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ARDEN LOGO



Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from    to

Commission File Number 000-30571

ARDEN REALTY LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  95-4599813
(IRS Employer I.D. Number)
 

11601 Wilshire Boulevard Fourth Floor
Los Angeles, California 90025-1740
(address of principal executive office)

Registrant’s telephone number, including area code: (310) 966-2600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by checkmark 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 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 the 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. [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   [ ]   No   [X]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant: Not applicable. No market for the Registrant’s common equity exists and, therefore, a market value for such units cannot be determined.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference Arden Realty, Inc.’s Proxy Statement for its Annual Meeting of Stockholders which the Registrant anticipates will be filed no later than 120 days after the end of Arden Realty, Inc.’s fiscal year pursuant to Regulation 14A

 


TABLE OF CONTENTS

PART I
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Controls and Procedures
PART IV
ITEM 15. Exhibits, Financial Statements, and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
Exhibit 10.55
Exhibit 12.1
Exhibit 21.1
Exhibit 23.1
Exhibit 99.1


Table of Contents

ARDEN REALTY LIMITED PARTNERSHIP
TABLE OF CONTENTS

         
    PAGE
ITEM     NO.
   
PART I
   
1.   Business   3
2.   Properties   8
3.   Legal Proceedings   21
4.   Submission of Matters to a Vote of Security Holders   21
   
PART II
   
5.   Market for Registrant’s Common Equity and Related Stockholder Matters   21
6.   Selected Financial Data   21
7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
7A.   Quantitative and Qualitative Disclosure about Market Risk   42
8.   Financial Statements and Supplementary Data   51
9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   52
   
PART III
   
10.   Directors and Executive Officers of the Registrant   52
11.   Executive Compensation   52
12.   Security Ownership of Certain Beneficial Owners and Management   52
13.   Certain Relationships and Related Transactions   52
14.   Controls and Procedures   52
   
PART IV
   
15.   Exhibits, Financial Statements and Reports on Form 8-K   53
    Signatures   60
    Certifications   61

 


Table of Contents

PART I

ITEM 1. Business

(a) GENERAL

     The terms “us”, “we” and “our” as used in this report refer to Arden Realty Limited Partnership. The term “Arden Realty” refers to Arden Realty, Inc. We are an operating partnership that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. Arden Realty, a real estate investment trust, or REIT, is our sole general partner and, as of December 31, 2002, owned approximately 97.3% of our common operating partnership units, or common OP Units.

(b) INDUSTRY SEGMENTS

     We are currently involved in only one industry segment, namely the operation of commercial real estate located in Southern California. All of the financial information contained in this report relates to this industry segment.

(c) DESCRIPTION OF BUSINESS

     We are a full-service real estate organization managed by 8 senior executive officers who have experience in the real estate industry ranging from 11 to 33 years and who collectively have an average of 19 years of experience. We perform all property management, construction management, accounting, finance, acquisition activities and a majority of our leasing transactions for our portfolio with our staff of approximately 300 employees.

     As of December 31, 2002, Arden Realty was Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of December 31, 2002, our portfolio of primarily suburban office properties consisted of 137 properties and 223 buildings containing approximately 19.4 million net rentable square feet including one development property with approximately 283,000 net rentable square feet under lease-up. As of December 31, 2002, our properties were 90.1% occupied.

Portfolio Management

     We perform all portfolio management activities, including management of all lease negotiations, construction management of tenant improvement, or tenant build-outs, property renovations, capital expenditures and on-site property management for our portfolio. We directly manage these activities from approximately 44 management offices located throughout our portfolio. The activities of these management offices are supervised by four regional offices with oversight by our corporate office to ensure consistency of the application of our operating policies and procedures. Each regional office is strategically located within the Southern California submarkets where our properties are located and is managed by a regional First Vice President who is responsible for supervising the day-to-day activities of our management offices. Each regional office is staffed with leasing, property management, building engineering, construction and information systems specialists, our Regional Service Teams. By maintaining a regionally focused organizational structure led by seasoned managers, we are able to quickly respond to our tenants’ needs and market opportunities.

     All of our management and regional offices are networked with our corporate office and have access to the Internet and our e-mail, accounting and lease management systems. Our accounting and lease management systems employ the latest technology and allow both corporate and field personnel access to tenant and prospective tenant-related information to enhance responsiveness and communication of marketing and leasing activity for each property.

     We currently lease approximately 70% of our portfolio’s net rentable space using our in-house staff. We employ outside brokers who are monitored by our Regional Service Teams for the remainder of our net rentable space. Our in-house leasing program allows us to closely monitor rental rates and lease terms for new and renewal leases and reduce third-party leasing commissions.

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Business Strategies

     Our primary business strategy is to actively manage our portfolio to seek to achieve gains in rental rates and occupancy, control operating expenses and maximize income from ancillary operations and services. When market conditions permit, we may also selectively develop or acquire new properties in submarkets that add value and fit strategically into our portfolio. We may also sell existing properties and deploy the proceeds into investments that we believe will generate higher long-term value.

     Through our corporate office and regional offices, we implement our business strategies by:

    using integrated decision making to provide proactive solutions to the space needs of users in the markets where we have extensive real estate and technical expertise;
 
    emphasizing quality service, tenant satisfaction and retention;
 
    employing intensive property marketing and leasing programs; and
 
    implementing cost control management techniques and systems that capitalize on economies of scale and concentration arising from the size and geographic focus of our portfolio.

     We believe the implementation of these operating practices has been instrumental in maximizing the operating results of our portfolio.

     Integrated Decision Making

     We use a multidisciplinary approach to our decision making by having our regional management, leasing, construction management, acquisition, disposition and finance teams coordinate their activities to enhance responsiveness to market opportunities and to provide proactive solutions to the space needs of users in the submarkets where we have extensive real estate and technical expertise. This integrated approach permits us to analyze the specific requirements of existing and prospective tenants and the economic terms and costs for each transaction on a timely and efficient basis. We are therefore able to commit to leasing, development, acquisition or disposition terms quickly, which facilitates an efficient completion of lease negotiation and tenant build-out, shorter vacancy periods after lease expirations and the timely completion of development, acquisition or disposition transactions.

     Quality Service and Tenant Satisfaction

     We strive to provide quality service through our multidisciplinary operating approach resulting in timely responses to our tenants’ needs. Our seasoned Regional Service Teams interact and resolve issues relating to tenant satisfaction and day-to-day operations. For portfolio-wide operational and administrative functions, our corporate office provides support to all regional offices and provides immediate response for critical operational issues.

     Proactive Leasing

     The concentration of many of our properties within particular office submarkets and our relationships with a broad array of businesses and outside brokers enables us to pursue proactive leasing strategies, to effectively monitor the demand of office space in our existing submarkets, to efficiently examine the office space requirements of existing and prospective tenants and to offer tenants a variety of space alternatives across our portfolio.

     Cost Control and Operating Efficiencies

     The size and geographic focus of our portfolio permits us to enhance portfolio value by controlling operating

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costs. We seek to capitalize on the economies of scale and concentration which result from the geographic focus of our portfolio through the ownership and management of multiple properties within particular submarkets and the maintenance of standardized process and systems for cost control at each of our properties. These cost controls and operating efficiencies allowed us to achieve a 68.5% ratio of property operating results to total property revenues in 2002.

  Operating Strategies

     Based on our geographic focus in Southern California, experience in the local real estate markets and our evaluation of current market conditions, we believe the following key factors provide us with opportunities to maximize returns:

    the broad diversification and balance of the Southern California economy and our tenant base minimizes our dependence on any one industry segment or small group of tenants;
 
    the relative resiliency of the Southern California real estate market, as measured by lower vacancy rates compared to the national average and a lower decline in rental rates in our key submarkets than the average decreases in rates reported for the nation since the beginning of the current national economic downturn; and
 
    the limited construction of new office properties in the Southern California region due to substantial building construction limitations and a minimal amount of developable land in most key submarkets.

     Internal Operating Strategy

     We believe that opportunities exist to increase cash flow from our existing portfolio. We intend to pursue internal growth by:

    stabilizing occupancy throughout our portfolio;
 
    capitalizing on economies of scale and concentration due to the size and geographic focus of our portfolio;
 
    controlling operating expenses through active cost control management and systems; and
 
    sourcing new and innovative revenue streams while providing high quality services to our tenants.

          Stabilizing Portfolio Occupancy

     Although our overall occupancy declined during 2002 by approximately 2.1% as a result of a continued downturn in the national and Southern California economic activity, we believe that we have been successful in attracting and retaining a diverse tenant base by actively managing our properties with an emphasis on tenant satisfaction and retention. Our in-house leasing teams, working with outside leasing brokers, continuously monitor each market to identify strong prospective tenants who are in need of new or additional space. We also strive to be responsive to the needs of existing tenants through our on-site professional management staff and by providing them with alternative space within our portfolio to accommodate their changing space requirements.

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          Cost Control Management and Systems

     We plan to continue controlling our operating expenses through active management at all of our properties. We focus on cost control in various areas of our operations. We continuously monitor the operating performance of our properties and employ energy-enhancing and expense recovery technologies when appropriate. These system enhancements include:

    lighting retrofits;
 
    replacement of inefficient heating, ventilation and air conditioning systems;
 
    computer-driven energy management systems that monitor and react to the climatic requirements of individual properties;
 
    automated security systems that allow us to provide security services to our tenants at a lower cost;
 
    enhancement of billing systems, which enable us to more efficiently recover operating expenses from our tenants; and
 
    on-going preventive maintenance programs to operate our building systems efficiently, thereby reducing operating costs.

          Capitalizing on Economies of Scale and Concentration

     In order to capitalize on economies of scale and concentration arising from the size and geographic focus of our portfolio, each of our Regional Service Teams is responsible for several properties, which spreads administrative and maintenance costs over those properties and reduces per square foot expenses. In addition, contracting in bulk for parking operations, building services and supplies on a portfolio-wide basis also reduces our overall operating expenses.

          Sourcing Additional Revenue While Providing High Quality Services to Tenants

     We have invested in energy enhancement programs within our portfolio with the aim of reducing energy consumption, enhancing efficiency and lowering operating costs. Over the past three years, we have been recognized by the Environmental Protection Agency with the national Commercial Real Estate Partner of the Year award for our performance in the Energy Star Program. The competition involves top commercial real estate landlords throughout the United States and rigorous bench-marking procedures that track individual building energy efficiency. Of the 673 total Energy Star designated office buildings awarded nationally, 309 were awarded in California; of those, we had 83 award-winning buildings and were cited for having the most energy efficient buildings within a single portfolio in the nation.

     In 2001, we formed our taxable REIT subsidiary, Next>edge, to market our expertise in energy solutions and facilities management. In 2002, Next>edge began to assist companies to increase their energy efficiency and reduce costs by employing the latest technologies and the most energy-efficient operational strategies developed to date. These technologies include lighting, heating, ventilation and air conditioning retrofits, energy management system installations, on-site distributed generation and cogeneration projects and solar energy systems.

     External Operating Strategy

     We believe in the diversity and balance of the Southern California commercial real estate market, and we intend to continue to focus our resources primarily in this region. We have assembled a management team that has extensive experience and knowledge in this market that we believe provides us with a competitive advantage in identifying and capitalizing on selective development, renovation and acquisition opportunities.

     Subject to capital availability and market conditions, our approach is to seek development, renovation and acquisition opportunities in markets where we have an existing presence and where the following conditions exist:

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    low vacancy rates;
 
    opportunities for rising rents due to employment growth and population movements;
 
    a minimal amount of developable land; and
 
    significant barriers to entry due to constraints on new development, including strict entitlement processes, height and density restrictions or other governmental requirements.

  Competition

     We compete with other owners and developers of office properties to attract tenants to our properties and to obtain suitable land for development. Ownership of competing properties is currently diversified among many different types, from publicly traded companies and institutional investors, including other REITs, to small enterprises and individual owners. No one owner or group of owners currently dominate or significantly influence the markets in which we operate. See “Risk Factors - Competition affects occupancy levels, rents and the cost of land which could adversely affect our revenues.’’

  California Electric Utility Deregulation

     Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas. All of our properties are currently located in areas served by utilities that either produce their own electricity, or that have procured long-term, fixed-rate contracts with commercial electrical providers. While we have no information suggesting that any future service interruptions are expected we believe that higher utility costs may continue as price increases are allowed by the California Public Utility Commission or other regulatory agencies.

     Approximately 28% of our properties and 21% of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs and the remainder provide that our tenants will reimburse us for utility costs in excess of a base year amount. See “Risk Factors - Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.’’

     We are also working with other companies to provide our properties with new applications of distributed generation, or on-site energy systems, such as solar microturbines, natural gas reciprocating engines, fuel cells and other “green” power alternatives. Lastly, we maintain ongoing communication with our tenants to assist them in ways to lower consumption in their workplace.

  Employees

     As of December 31, 2002, we had approximately 300 full-time employees that perform all of our property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions.

  Available Information

     This annual report on Form 10-K and other periodic and current reports filed with the Securities and Exchange Commission, or SEC, are available, free of charge, by viewing the SEC Filings available in the Investor Information section of our website at www.ardenrealty.com as soon as reasonably practicable after we file them with the SEC.

(d) FOREIGN OPERATIONS

     We do not engage in any foreign operations or derive any revenue from foreign sources.

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ITEM 2. Properties

  Existing Portfolio

     Our portfolio consists of 136 primarily office properties, containing approximately 19.1 million net rentable square feet, excluding a newly developed property with approximately 283,000 net rentable square feet currently under lease-up, that individually range from approximately 12,000 to 600,000 net rentable square feet. Of the 136 properties currently in service in our portfolio, 134 or 99% are office properties. All of our properties are located in Southern California and most are in suburban areas in close proximity to main thoroughfares. We believe that our properties are located within desirable and established business communities and are well maintained. Our properties offer an array of amenities including high-speed internet access, security, parking, conference facilities, on-site management, food services and health clubs.

     Following is a summary of our property portfolio as of December 31, 2002:

                                                                     
                                                        Property
                                                        Operating Results(2), (3)
        Number   Number                  
        of   of   Approximate Net   For the Year Ended
Location   Properties(1)   Buildings(1)   Rentable Square Feet(1)   December 31, 2002

 
 
 
 
                                                        ($000's and unaudited)
                % of           % of           % of           % of
        Total   Total   Total   Total   Total   Total   Total   Total
       
 
 
 
   
   
   
   
Los Angeles County
                                                               
   
West(4)
    31       23 %     33       15 %     5,021,715       26 %   $ 108,411       38 %
   
North
    29       21 %     46       21 %     3,231,591       17 %     45,407       16 %
   
South
    16       12 %     21       9 %     3,057,925       16 %     33,181       12 %
   
 
   
     
     
     
     
     
     
     
 
   
Subtotal
    76       56 %     100       45 %     11,311,231       59 %     186,999       66 %
Orange County
    24       18 %     57       25 %     3,708,926       19 %     47,722       17 %
San Diego County
    25       18 %     40       18 %     2,857,195       15 %     33,384       12 %
Ventura/Kern Counties
    6       4 %     17       8 %     778,363       4 %     9,240       3 %
Riverside/San Bernardino Counties (5)
    5       4 %     8       4 %     476,461       3 %     4,986       2 %
   
 
   
     
     
     
     
     
     
     
 
   
Total
    136 (6)     100 %     222 (6)     100 %     19,132,176 (6)     100 %   $ 282,331       100 %
   
 
   
     
     
     
     
     
     
     
 


(1)   Includes one property with approximately 140,000 net rentable square feet held for disposition.
 
(2)   We define Property Operating Results as revenue (including rent, tenant reimbursements, parking income and all other property specific revenues) less property operating expenses (including property taxes, insurance, utilities, repairs and maintenance and all other property specific operating expenses but excluding depreciation and financing costs). This measure is commonly used by investors to evaluate the performance of real estate companies, to determine trends in earnings and to compute the fair value of properties as it is not affected by (1) the cost of funds of the property owner or (2) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP. The first factor is commonly eliminated from net income because it is specific to the particular financing capabilities and constraints of the owner. The second factor is commonly eliminated because it may not accurately represent the actual change in value in real estate properties that results from use or changes in market conditions. We believe that eliminating these costs from net income gives investors an additional measure of operating performance that, when used as an adjunct to net income computed in accordance with GAAP, can be a useful measure of our operating results.
 
    Property Operating Results captures trends in occupancy rates, rental rates and operating costs. However, Property Operating Results excludes general and administrative costs, interest expense, interest income, depreciation and amortization expense and gains or losses from the sale of properties, changes in value in our real estate properties that result from use or permanent impairment to carrying costs as stipulated by GAAP or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Therefore, Property Operating Results may fail to capture significant trends which limits its usefulness.
 
    Property Operating Results is a non-GAAP measure of performance. Property Operating Results is not a substitute for net income as computed in accordance with GAAP. It excludes significant expense components such as depreciation and amortization expense and financing costs. This measure should be analyzed in conjunction with net income and cash flow from operating activities as computed in accordance with GAAP. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

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The following is a reconciliation of income from continuing operations before gain on sale of properties and minority interest to Property Operating Results (in thousands):

                           
      Year Ended December 31,
     
      2002   2001   2000
     
 
 
Income from continuing operations before gain on sale of properties and minority interest
  $ 74,351     $ 100,287     $ 101,978  
Add:
                       
 
General and administrative expense
    11,804       11,083       8,306  
 
Interest expense
    88,516       84,195       78,406  
 
Depreciation and amortization
    110,202       100,775       85,947  
Less:
                       
 
Interest and other income
    (2,542 )     (2,941 )     (3,527 )
 
   
     
     
 
Property Operating Results
  $ 282,331     $ 293,399     $ 271,110  
 
   
     
     
 

(3)   Excludes the operating results of one property classified as held for disposition. The operating results for this property are reported as part of discontinued operations in our consolidated statements of income.
 
(4)   Includes a retail property with approximately 37,000 net rentable square feet.
 
(5)   Includes a retail property with approximately 133,000 net rentable square feet.
 
(6)   Including one development property currently under lease-up, our total portfolio consists of 137 properties with 223 buildings and approximately 19.4 million rentable square feet.

          The following is a summary of our occupancy and in-place rents as of December 31, 2002:

                                   
                      Annualized Base Rent
Location   Percent Occupied   Percent Leased   Per Leased Square Foot (1)

 
 
 
                              Full Service
                      Portfolio Total   Gross Leases (2)
                     
 
Los Angeles County
                               
 
West
    90.2 %     91.4 %   $ 28.46     $ 28.60  
 
North
    86.1 %     89.1 %     21.48       22.32  
 
South
    87.7 %     89.3 %     19.34       20.43  
Orange County
    94.8 %     95.4 %     18.28       21.46  
San Diego County
    88.9 %     88.9 %     18.54       22.91  
Ventura/Kern Counties
    96.2 %     96.7 %     18.46       18.70  
Riverside/San
                               
 
Bernardino Counties
    93.9 %     94.6 %     17.29       19.85  
 
 
   
     
     
     
 
 
Total/Weighted Average
    90.1 %     91.4 %   $ 21.67     $ 23.68  
 
 
   
     
     
     
 


(1)   Based on monthly contractual base rent under existing leases as of December 31, 2002, multiplied by 12 and divided by leased net rentable square feet; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.
 
(2)   Excludes 38 properties and approximately 3.9 million square feet under triple net and modified gross leases.

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Development Properties

     In addition to the properties listed above, we currently have one development property containing approximately 283,000 net rentable square feet under lease-up. This property is located in the Howard Hughes Center, a 70-acre commercial development located two miles north of Los Angeles International Airport and immediately adjacent to the San Diego Freeway (I-405), with on- and off-ramps that directly serve the site.

     The following table summarizes information about this property as of December 31, 2002:

                                 
                        Estimated        
                        Year 1        
                        Stabilized        
                        Cash   Estimated   Estimated
    Costs   Estimated   Percent           Property   Year 1   Year 1
    Incurred   Total   Leased   Shell   Estimated   Operating   Annual   Annual
    To Date   Cost(1)   at   Completion   Stabilization   Results(3)   Cash   GAAP
Property   ($000's)   ($000's)   3/24/03   Date   Date(2)   ($000's)   Yield   Yield (4)

 
 
 
 
 
 
 
 
Howard Hughes Center:                                
6100 Center Drive $ 65,296 $ 81,500     2nd Qtr 2002   4th Qtr 2003 $ 6,450   7.9 % 8.9 %
   
 
             
 
 

(1)   Estimated total cost includes purchase and closing costs, capital expenditures, tenant improvements, leasing commissions and carrying costs during development, as well as an allocation of land and master plan costs.
 
(2)   We consider a property to be stabilized in the quarter when the property is at least 95% leased.
 
(3)   We consider stabilized Cash Property Operating Results to be the rental revenues from the property less the operating expenses of the property on a cash basis before deducting financing costs (interest and principle payments) after the property is at least 95% leased. Property Operating Results are discussed in greater detail in Note (2) to the Existing Portfolio summary table above.
 
(4)   Estimated Year 1 Annual GAAP Yield includes an adjustment for straight-line rents.

     In addition to the property above, we have entitlements and preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center totaling an additional 425,000 net rentable square feet. We also have construction entitlements at the Howard Hughes Center for up to 600 hotel rooms. Build-to-suit buildings consist of properties constructed to the tenant’s specifications in return for the tenant’s long-term commitment to the property. We do not intend to commence construction on any additional build-to-suit buildings or hotels at the Howard Hughes Center until development plans and budgets are finalized and build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with each project’s development risk.

     In addition to our development at the Howard Hughes Center, we have completed preliminary designs and are marketing an approximately 170,000 net rentable square foot build-to-suit office building at our Long Beach Airport Business Park. Also, as part of our Gateway Towers acquisition in August 2002, we acquired a 5-acre developable land parcel in Torrance, California that we are also marketing for a build-to-suit building. We do not intend to commence construction on these projects until build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with each project’s development risk.

     We expect to finance our development activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales or proceeds from our lines of credit.

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     Acquisitions

     The following table summarizes our acquisition activity during 2002:

                                 
                            Purchase
            Date of   Property   Square   Price
Property   County   Submarket   Purchase   Type   Feet   ($000’s)

 
 
 
 
 
 
Gateway Towers   Los Angeles   Torrance   August 7, 2002   Office     432,894     $ 62,500  
Gateway Land Parcel   Los Angeles   Torrance   August 7, 2002   Developable Land     N/A       3,500  
Crossroads   San Diego   Mission Valley   August 16, 2002   Office     133,566       16,900  
Governor Executive Center   San Diego   Governor Park   August 16, 2002   Office     52,195       11,200  
Carmel Valley Center I & II   San Diego   Del Mar Heights   August 30, 2002   Office     107,197       28,400  
Carmel View Office Plaza   San Diego   Rancho Bernardo   August 30, 2002   Office     77,460       12,500  
                     
     
 
        Total                     803,312     $ 135,000  
                     
     
 

     Dispositions

     The following table summarizes our disposition activity during 2002:

                                 
                            Sales
            Date of   Property   Square   Price
Property   County   Submarket   Sale   Type   Feet   ($000’s)

 
 
 
 
 
 
Harbor Corporate Center   Los Angeles   Torrance   March 7, 2002   Office     63,925     $ 6,900  
Renaissance Court   Los Angeles   Simi / Conejo Valley   April 16, 2002   Office     61,245       8,300  
6800 Owensmouth   Los Angeles   West San Fernando Valley   May 1, 2002   Office     80,014       8,400  
2730 Wilshire Apartments   Los Angeles   Santa Monica   November 1, 2002   Apartment     (1)     2,300  
                     
     
 
        Total                     205,184     $ 25,900  
                     
     
 



(1)   Consists of 16 apartment units.

11


Table of Contents

     The following table presents specific information regarding our 136 stabilized properties as of December 31, 2002:

                                   
                      Year(s)   Approximate
                      Built/   Net Rentable
Property Name   Submarket     Location     Renovated   Square Feet

 
 
   
 
Los Angeles County
                               
Los Angeles West
                               
9665 Wilshire
  Beverly Hills/Century City   Beverly Hills     1972/92-93       158,684  
Beverly Atrium
  Beverly Hills/Century City   Beverly Hills     1989       59,650  
8383 Wilshire
  Beverly Hills/Century City   Beverly Hills     1971/93       417,463  
120 S. Spalding
  Beverly Hills/Century City   Beverly Hills     1984       60,656  
9100 Wilshire Blvd
  Beverly Hills/Century City   Beverly Hills     1971/90       326,227  
Century Park Center
  Beverly Hills/Century City   Los Angeles     1972/94       243,404  
10350 Santa Monica
  Beverly Hills/Century City   Los Angeles     1979       42,292  
10351 Santa Monica
  Beverly Hills/Century City   Los Angeles     1984       96,251  
Westwood Terrace
  Westwood/West Los Angeles   Los Angeles     1988       135,943  
1950 Sawtelle
  Westwood/West Los Angeles   Los Angeles     1988/95       103,106  
10780 Santa Monica
  Westwood/West Los Angeles   Los Angeles     1984       92,486  
Wilshire Pacific Plaza
  Westwood/West Los Angeles   Los Angeles     1976/87       100,122  
World Savings Center(2)
  Westwood/West Los Angeles   Los Angeles     1983       469,115  
11075 Santa Monica
  Westwood/West Los Angeles   Los Angeles     1983       35,696  
2730 Wilshire
  Westwood/West Los Angeles   Santa Monica     1985       55,080  
2800 28th Street
  Westwood/West Los Angeles   Santa Monica     1979       103,506  
1919 Santa Monica
  Westwood/West Los Angeles   Santa Monica     1991       43,796  
2001 Wilshire Blvd
  Westwood/West Los Angeles   Santa Monica     1980       101,125  
Westwood Center
  Westwood/West Los Angeles   Santa Monica     1965/2000       313,000  
400 Corporate Pointe
  Marina Area/Culver City/LAX   Culver City     1987       164,598  
600 Corporate Pointe
  Marina Area/Culver City/LAX   Culver City     1989       273,339  
Bristol Plaza
  Marina Area/Culver City/LAX   Culver City     1982       84,014  
Northpoint
  Marina Area/Culver City/LAX   Los Angeles     1991       104,235  
Howard Hughes Spectrum Club
  Marina Area/Culver City/LAX   Los Angeles     1993       36,959  
Howard Hughes Tower
  Marina Area/Culver City/LAX   Los Angeles     1987       313,833  
6060 Center Drive
  Marina Area/Culver City/LAX   Los Angeles     2000       241,928  
6080 Center Drive
  Marina Area/Culver City/LAX   Los Angeles     2002       287,148  
Univision-5999 Center Drive
  Marina Area/Culver City/LAX   Los Angeles     2001       161,650  
6100 Wilshire
  Park Mile/West Hollywood   Los Angeles     1986       202,704  
145 South Fairfax
  Park Mile/West Hollywood   Los Angeles     1984       53,994  
Beverly Sunset Medical Plaza(3)
  Park Mile/West Hollywood   Los Angeles     1963/92-95       139,711  
 
                           
 
 
Subtotal/Weighted Average – Los Angeles West
                            5,021,715  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                           
                                      Annualized
      Percentage of                           Base Rent
      Total                           per Leased
      Portfolio Net           Annualized   Number   Net Rentable
      Rentable   Percent   Base Rent   of   Square
Property Name   Square Feet   Leased   ($000s)   Leases   Foot(1)

 
 
 
 
 
Los Angeles County
                                       
Los Angeles West
                                       
9665 Wilshire
    0.8 %     99.3 %   $ 5,900       21     $ 37.44  
Beverly Atrium
    0.3       94.1       1,578       14       28.10  
8383 Wilshire
    2.2       90.2       9,700       124       25.75  
120 S. Spalding
    0.3       100.0       2,408       14       38.27  
9100 Wilshire Blvd
    1.7       91.7       8,160       71       27.26  
Century Park Center
    1.3       91.3       5,131       92       23.08  
10350 Santa Monica
    0.2       83.9       828       15       23.32  
10351 Santa Monica
    0.5       87.7       1,929       15       22.86  
Westwood Terrace
    0.7       98.5       3,726       26       27.82  
1950 Sawtelle
    0.5       88.1       2,266       35       24.96  
10780 Santa Monica
    0.5       95.4       2,135       34       24.21  
Wilshire Pacific Plaza
    0.5       92.2       2,434       39       26.37  
World Savings Center(2)
    2.5       94.2       13,468       55       30.49  
11075 Santa Monica
    0.2       91.3       799       6       24.53  
2730 Wilshire
    0.3       100.0       1,496       32       26.57  
2800 28th Street
    0.5       82.3       2,328       37       27.32  
1919 Santa Monica
    0.2       70.9       910       3       29.32  
2001 Wilshire Blvd
    0.5       93.2       2,626       19       27.87  
Westwood Center
    1.7       83.1       9,818       36       37.75  
400 Corporate Pointe
    0.9       100.0       3,179       21       19.32  
600 Corporate Pointe
    1.4       91.1       5,736       21       23.05  
Bristol Plaza
    0.4       97.7       1,687       28       20.55  
Northpoint
    0.5       78.4       2,569       7       31.43  
Howard Hughes Spectrum Club
    0.2       100.0       909       1       24.60  
Howard Hughes Tower
    1.6       74.3       6,922       30       29.70  
6060 Center Drive
    1.3       100.0       8,473       8       34.14  
6080 Center Drive
    1.5       96.0       9,684       14       36.26  
Univision-5999 Center Drive
    0.9       100.0       4,247       2       25.53  
6100 Wilshire
    1.1       100.0       5,397       55       26.03  
145 South Fairfax
    0.3       90.0       1,066       13       21.92  
Beverly Sunset Medical Plaza(3)
    0.7       74.7       3,137       55       30.06  
 
   
     
     
     
     
 
 
Subtotal/Weighted Average – Los Angeles West
    26.2 %     91.4 %   $ 130,646       943     $ 28.46  

12


Table of Contents

                        Year(s)     Approximate
                      Built/   Net Rentable
Property Name   Submarket   Location   Renovated   Square Feet

 
 
 
 
Los Angeles North
                               
Calabasas Commerce Center
  Simi/Conejo Valley   Calabasas     1990       126,771  
Calabasas Tech
  Simi/Conejo Valley   Calabasas     1990/2001       273,526  
Pennsfield Plaza
  Simi/Conejo Valley   Thousand Oaks     1989       21,202  
Conejo Business Center
  Simi/Conejo Valley   Thousand Oaks     1991       69,017  
Marin Corporate Center
  Simi/Conejo Valley   Thousand Oaks     1986       51,360  
Hillside Corporate Center
  Simi/Conejo Valley   Westlake     1998       59,876  
Westlake – 5601 Lindero
  Simi/Conejo Valley   Westlake     1989       105,830  
Westlake Gardens
  Simi/Conejo Valley   Westlake     1998       49,639  
Westlake Gardens II
  Simi/Conejo Valley   Westlake     1999       48,874  
Woodland Hills
  West San Fernando Valley   Woodland Hills     1972/95       224,955  
Los Angeles Corporate Center
  San Gabriel Valley   Monterey Park     1984/86       389,293  
Clarendon Crest
  West San Fernando Valley   Woodland Hills     1990       43,063  
Lyons Plaza
  Santa Clarita Valley   Santa Clarita     1990       61,203  
Tourney Pointe
  Santa Clarita Valley   Santa Clarita     1985/98-2000       219,991  
16000 Ventura
  Central San Fernando Valley   Encino     1980/96       174,841  
15250 Ventura
  Central San Fernando Valley   Sherman Oaks     1970/90-91       110,641  
Noble Professional Center
  Central San Fernando Valley   Sherman Oaks     1985/93       51,828  
Sunset Point Plaza
  Valencia   Newhall     1988       58,105  
303 Glenoaks
  Central San Fernando Valley   Burbank     1983/96       175,289  
601 S. Glenoaks
  Central San Fernando Valley   Burbank     1990       72,524  
Burbank Executive Plaza
  Central San Fernando Valley   Burbank     1983       60,395  
California Federal Building
  Central San Fernando Valley   Burbank     1978       81,243  
425 West Broadway
  Central San Fernando Valley   Glendale     1984       71,589  
Glendale Corporate Center
  Central San Fernando Valley   Glendale     1985       108,209  
70 South Lake
  Central San Fernando Valley   Pasadena     1982/94       100,133  
150 East Colorado Boulevard
  Central San Fernando Valley   Pasadena     1979/97       61,168  
299 N. Euclid
  Central San Fernando Valley   Pasadena     1983       73,522  
5161 Lankershim
  Central San Fernando Valley   North Hollywood     1985/97       178,317  
535 N. Brand Blvd
  Central San Fernando Valley   North Hollywood     1973/92/99       109,187  
 
                           
 
 
Subtotal/Weighted Average — Los Angeles North
                            3,231,591  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                           
                                       
      Percentage of                           Annualized
Base Rent
      Total
Portfolio Net
          Annualized           per Leased
Net Rentable
      Rentable   Percent   Base Rent   Number of   Square
Property Name   Square Feet   Leased   ($000s)   Leases   Feet(1)

 
 
 
 
 
Los Angeles North
                                       
Calabasas Commerce Center
    0.7 %     89.9 %   $ 2,089       11     $ 18.33  
Calabasas Tech
    1.3       100.0       4,846       16       17.31  
Pennsfield Plaza
    0.1       95.2       382       12       18.94  
Conejo Business Center
    0.4       80.5       1,131       25       20.34  
Marin Corporate Center
    0.3       97.7       1,101       31       21.96  
Hillside Corporate Center
    0.3       87.7       1,342       9       25.55  
Westlake – 5601 Lindero
    0.6       78.1       1,468       2       17.75  
Westlake Gardens
    0.3       87.6       1,204       16       27.69  
Westlake Gardens II
    0.3       100.0       1,243       4       25.44  
Woodland Hills
    1.2       87.5       4,616       68       23.45  
Los Angeles Corporate Center
    2.0       97.9       7,889       45       20.70  
Clarendon Crest
    0.2       89.5       801       16       20.76  
Lyons Plaza
    0.3       68.3       1,001       23       23.95  
Tourney Pointe
    1.1       84.8       3,638       32       19.51  
16000 Ventura
    0.9       95.7       3,746       46       22.39  
15250 Ventura
    0.6       89.9       2,271       39       22.83  
Noble Professional Center
    0.3       96.9       1,126       19       22.41  
Sunset Point Plaza
    0.3       97.6       1,436       27       25.31  
303 Glenoaks
    0.9       59.0       2,450       23       23.68  
601 S. Glenoaks
    0.4       83.6       1,307       14       21.56  
Burbank Executive Plaza
    0.3       74.3       1,112       13       24.80  
California Federal Building
    0.4       84.2       1,297       12       18.96  
425 West Broadway
    0.4       96.0       1,472       13       21.41  
Glendale Corporate Center
    0.6       85.6       1,926       19       20.79  
70 South Lake
    0.5       97.3       2,480       17       25.47  
150 East Colorado Boulevard
    0.3       94.0       1,306       19       22.71  
299 N. Euclid
    0.4       100.0       1,688       5       22.92  
5161 Lankershim
    0.9       83.6       3,358       7       22.53  
535 N. Brand Blvd
    0.6       88.1       2,113       40       21.96  
 
   
     
     
     
     
 
 
Subtotal/Weighted Average — Los Angeles North
    16.9 %     89.1 %   $ 61,839       623     $ 21.48  

13


Table of Contents

                                 
                    Year(s)   Approximate
                    Built/   Net Rentable
Property Name   Submarket   Location   Renovated   Square Feet

 
 
 
 
Los Angeles South
                               
Long Beach Airport Bldg D(2)
  Long Beach   Long Beach     1987/95       121,610  
Long Beach Airport Bldg F & G(2)
  Long Beach   Long Beach     1987/95       150,403  
5000 East Spring(2)
  Long Beach   Long Beach     1989/95       163,358  
100 Broadway
  Long Beach   Long Beach     1987/96       191,727  
1501 Hughes Way
  Long Beach   Long Beach     1983/97       77,060  
3901 Via Oro
  Long Beach   Long Beach     1986/97       53,195  
Oceangate Tower
  Long Beach   Long Beach     1971/93-94       210,907  
Continental Grand Plaza
  El Segundo   El Segundo     1986       235,926  
Grand Avenue Plaza (1970)
  El Segundo   El Segundo     1980       81,448  
5200 West Century
  Marina Area/Culver City/LAX   Culver City     1982/98-99       310,910  
Skyview Center
  Marina Area/Culver City/LAX   Los Angeles     1981/87/95       391,675  
South Bay Centre
  Torrance   Gardena     1984       202,830  
Pacific Gateway
  Torrance   Torrance     1982/90       223,731  
Mariner Court
  Torrance   Torrance     1989       105,436  
South Bay Tech
  Torrance   Torrance     1984       104,815  
Gateway Towers
  Torrance   Torrance     1984/86       432,894  
 
                           
 
Subtotal/Weighted Average —
Los Angeles South
                            3,057,925  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                         
                                    Annualized
    Percentage of                           Base Rent
    Total                           per Leased
    Portfolio Net           Annualized           Net Rentable
    Rentable   Percent   Base Rent   Number of   Square
Property Name   Square Feet   Leased   ($000s)   Leases   Feet(1)

 
 
 
 
 
Los Angeles South
                                       
Long Beach Airport Bldg D(2)
    0.6 %     100.0 %   $ 1,211       1     $ 9.96  
Long Beach Airport Bldg F & G(2)
    0.8       100.0       1,354       1       9.00  
5000 East Spring(2)
    0.9       85.4       3,407       33       24.43  
100 Broadway
    1.0       91.5       4,009       35       22.87  
1501 Hughes Way
    0.4       79.0       1,123       4       18.45  
3901 Via Oro
    0.3       90.1       868       4       18.12  
Oceangate Tower
    1.1       91.1       3,457       40       17.99  
Continental Grand Plaza
    1.2       73.4       4,679       29       27.01  
Grand Avenue Plaza (1970)
    0.4       82.6       1,225       4       18.20  
5200 West Century
    1.6       100.0       5,698       40       17.85  
Skyview Center
    2.0       77.3       5,182       53       17.12  
South Bay Centre
    1.1       94.9       3,594       35       18.67  
Pacific Gateway
    1.2       98.7       4,608       41       20.87  
Mariner Court
    0.6       96.7       2,017       37       19.78  
South Bay Tech
    0.5       68.0       1,228       8       17.22  
Gateway Towers
    2.3       91.1       9,144       66       23.19  
 
   
     
     
     
     
 
Subtotal/Weighted Average —
Los Angeles South
    16.0 %     89.3 %   $ 52,804       431     $ 19.34  

14


Table of Contents

                                   
                      Year(s)   Approximate
                      Built/   Net Rentable
Property Name   Submarket   Location   Renovated   Square Feet

 
 
 
 
Orange County
                               
Whittier
  San Gabriel Valley   Whittier     1982       135,415  
1370 Valley Vista
  San Gabriel Valley   Diamond Bar     1988       84,081  
5832 Bolsa
  West County   Huntington Beach     1985       49,355  
Huntington Beach Plaza
  West County   Huntington Beach     1984/96       52,186  
5702 Bolsa
  West County   Huntington Beach     1987/97       27,731  
5672 Bolsa
  West County   Huntington Beach     1987       11,968  
5632 Bolsa
  West County   Huntington Beach     1987       21,568  
Huntington Commerce Center
  West County   Huntington Beach     1987       67,551  
City Centre
  West County   Fountain Valley     1982       302,519  
Fountain Valley Plaza
  West County   Fountain Valley     1982       107,252  
3300 Irvine Avenue
  Greater Airport Area   Newport Beach     1981/97       74,224  
1821 Dyer
  Greater Airport Area   Irvine     1980/88       115,061  
Von Karman Corporate Center
  Greater Airport Area   Irvine     1981/84       451,477  
Norwalk
  Long Beach   Norwalk     1978/94       122,175  
91 Freeway Center
  Mid-Cities   Artesia     1986/97       93,277  
1503 South Coast
  Greater Airport Area   Costa Mesa     1979/97       60,605  
222 South Harbor (2)
  Tri-Freeway Area   Anaheim     1986/91       175,391  
Crown Cabot Financial
  South County   Laguna Niguel     1989       172,900  
625 The City
  Tri-Freeway Area   Orange     1985/97       139,806  
Orange Financial Center
  Central County   Orange     1985/95       305,439  
Centerpointe La Palma
  North County   La Palma     1986/88/90       597,550  
Lambert Office Plaza
  North County   Brea     1986/97       32,807  
Savi Tech Center
  North County   Yorba Linda     1989       341,446  
Yorba Linda Business Park
  North County   Yorba Linda     1988       167,142  
 
                           
 
 
Subtotal/Weighted Average —
Orange County
                            3,708,926  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                           
                                      Annualized
      Percentage of                           Base Rent
      Total                           per Leased
      Portfolio Net           Annualized           Net Rentable
      Rentable   Percent   Base Rent   Number of   Square
Property Name   Square Feet   Leased   ($000s)   Leases   Feet(1)

 
 
 
 
 
Orange County
                                       
Whittier
    0.7 %     97.4 %   $ 3,014       45     $ 22.85  
1370 Valley Vista
    0.4       100.0       1,735       15       20.44  
5832 Bolsa
    0.3       100.0       740       1       15.00  
Huntington Beach Plaza
    0.3       73.5       644       15       16.79  
5702 Bolsa
    0.1       100.0       220       2       7.92  
5672 Bolsa
    0.1       100.0       98       1       8.16  
5632 Bolsa
    0.1       100.0       181       1       8.40  
Huntington Commerce Center
    0.4       81.2       500       20       9.11  
City Centre
    1.6       97.1       5,772       20       19.65  
Fountain Valley Plaza
    0.6       100.0       2,254       9       20.91  
3300 Irvine Avenue
    0.4       91.2       1,680       27       24.83  
1821 Dyer
    0.6       94.3       1,246       3       11.49  
Von Karman Corporate Center
    2.4       97.7       9,240       32       20.95  
Norwalk
    0.6       97.8       2,142       9       17.92  
91 Freeway Center
    0.5       93.3       1,763       29       20.25  
1503 South Coast
    0.3       79.2       899       21       18.74  
222 South Harbor (2)
    0.9       84.9       3,034       20       20.38  
Crown Cabot Financial
    0.9       94.9       4,699       39       28.65  
625 The City
    0.7       87.6       2,540       31       20.75  
Orange Financial Center
    1.6       98.1       6,506       37       21.72  
Centerpointe La Palma
    3.1       95.6       10,533       89       18.44  
Lambert Office Plaza
    0.2       95.3       677       11       21.64  
Savi Tech Center
    1.8       100.0       3,130       4       9.17  
Yorba Linda Business Park
    0.8       98.6       1,435       61       8.70  
 
   
     
     
     
     
 
 
Subtotal/Weighted Average —
Orange County
    19.4 %     95.4 %   $ 64,682       542     $ 18.28  

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Table of Contents

                                   
                      Year(s)   Approximate
                      Built/   Net Rentable
Property Name   Submarket   Location   Renovated   Square Feet

 
 
 
 
San Diego County
                               
701 B Street(2)
  Downtown   San Diego     1982/96       540,413  
Foremost Professional Plaza
  I-15 Corridor   San Diego     1992       60,534  
Activity Business Center
  I-15 Corridor   San Diego     1987       167,045  
Bernardo Regency
  I-15 Corridor   San Diego     1986       47,916  
Carlsbad Corporate Center
  North Coast   Carlsbad     1996       125,000  
10180 Scripps Ranch
  I-15 Corridor   San Diego     1978/96       43,560  
Cymer Technology Center
  I-15 Corridor   Rancho Bernardino     1986       155,612  
Via Frontera
  I-15 Corridor   Rancho Bernardino     1982/97       77,920  
Poway Industrial
  I-15 Corridor   Poway     1991/96       112,000  
Balboa Corporate Center
  Mission Valley/Kearny Mesa   San Diego     1990       69,890  
Panorama Corporate Center
  Mission Valley/Kearny Mesa   San Diego     1991       133,149  
Ruffin Corporate Center
  Mission Valley/Kearny Mesa   San Diego     1990       45,059  
Skypark Office Plaza
  Mission Valley/Kearny Mesa   San Diego     1986       202,164  
Governor Park Plaza
  North City   San Diego     1986       104,065  
Westridge
  North City   San Diego     1984/96       48,955  
5120 Shoreham
  North City   San Diego     1984       37,759  
Morehouse Tech Center
  North City   San Diego     1984       181,207  
Torreyana Science Park
  North City   La Jolla     1980/97       81,204  
Waples Tech Center
  North City   San Diego     1990       28,119  
Genesee Executive Plaza
  North City   San Diego     1984       155,820  
10251 Vista Sorrento
  North City   San Diego     1981/95       69,386  
Carmel Valley Centre
  Del Mar Heights   San Diego     1987/89       107,197  
Governor Executive Center
  Governor Park   San Diego     1988       52,195  
Crossroads
  Mission Valley   San Diego     1979       133,566  
Carmel View Office Plaza
  Rancho Bernardo/Poway   San Diego     1985       77,460  
 
                           
 
 
Subtotal/Weighted Average —
San Diego County
                            2,857,195  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                           
                                      Annualized
      Percentage of                           Base Rent
      Total                           per Leased
      Portfolio Net           Annualized           Net Rentable
      Rentable   Percent   Base Rent   Number of   Square
Property Name   Square Feet   Leased   ($000s)   Leases   Feet(1)

 
 
 
 
 
San Diego County
                                       
701 B Street(2)
    2.8 %     86.8 %   $ 10,110       78     $ 21.56  
Foremost Professional Plaza
    0.3       88.5       1,373       30       25.62  
Activity Business Center
    0.8       92.8       2,217       40       14.30  
Bernardo Regency
    0.3       64.4       780       14       25.30  
Carlsbad Corporate Center
    0.7       100.0       1,207       1       9.36  
10180 Scripps Ranch
    0.2       100.0       445       1       10.22  
Cymer Technology Center
    0.8       100.0       1,813       2       11.65  
Via Frontera
    0.4       100.0       834       6       10.58  
Poway Industrial
    0.6       100.0       672       1       6.00  
Balboa Corporate Center
    0.4       100.0       843       1       12.06  
Panorama Corporate Center
    0.7                          
Ruffin Corporate Center
    0.2       100.0       495       1       10.98  
Skypark Office Plaza
    1.1       99.6       4,023       19       19.98  
Governor Park Plaza
    0.5       93.1       2,334       20       24.10  
Westridge
    0.3       100.0       752       4       15.37  
5120 Shoreham
    0.2       94.9       750       6       20.94  
Morehouse Tech Center
    0.9       89.3       2,908       7       17.97  
Torreyana Science Park
    0.4       100.0       1,894       1       23.32  
Waples Tech Center
    0.1       91.9       364       3       14.07  
Genesee Executive Plaza
    0.8       75.1       3,178       18       27.17  
10251 Vista Sorrento
    0.4       100.0       1,193       1       17.20  
Carmel Valley Centre
    0.6       94.1       3,153       15       31.25  
Governor Executive Center
    0.3       97.0       1,291       11       25.50  
Crossroads
    0.7       100.0       2,680       12       20.07  
Carmel View Office Plaza
    0.4       95.5       1,785       14       24.11  
 
   
     
     
     
     
 
 
Subtotal/Weighted Average —
San Diego County
    14.9 %     88.9 %   $ 47,094       306     $ 18.54  

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Table of Contents

                                   
                      Year(s)   Approximate
                      Built/   Net Rentable
Property Name   Submarket   Location   Renovated   Square Feet

 
 
 
 
Ventura & Kern Counties
                               
Parkway Center I
  Bakersfield   Bakersfield     1992/95       61,333  
4900 California
  Bakersfield   Bakersfield     1983       155,189  
Center Promenade
  West County   Ventura     1982       174,837  
1000 Town Center
  West County   Oxnard     1989       107,656  
Solar Drive Business Center
  West County   Oxnard     1982       125,132  
Camarillo Business Park
  West County   Camarillo     1984/97       154,216  
 
                           
 
 
Subtotal/Weighted Average —
Ventura & Kern Counties
                            778,363  
Riverside and San Bernardino Counties
                               
Centrelake Plaza
  Inland Empire West   Ontario     1989       110,763  
Tower Plaza Retail
  Temecula   Temecula     1970/97       133,481  
Chicago Avenue Business Park
  Inland Empire East   Riverside     1986       47,482  
Havengate Center
  Inland Empire East   Rancho Cucamonga     1985       80,557  
HDS Plaza
  Inland Empire East   San Bernardino     1987       104,178  
 
                           
 
 
Subtotal/Weighted Average — Riverside and San Bernardino Counties
                            476,461  
 
                           
 
 
Portfolio Total/ Weighted Average
                            19,132,176  
 
                           
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                           
                                      Annualized
      Percentage of                           Base Rent
      Total                           per Leased
      Portfolio Net           Annualized   Number   Net Rentable
      Rentable   Percent   Base Rent   of   Square
Property Name   Square Feet   Leased   ($000s)   Leases   Feet(1)

 
 
 
 
 
Ventura & Kern Counties
                                       
Parkway Center I
    0.3 %     95.6 %   $ 1,099       13     $ 18.74  
4900 California
    0.8       95.5       2,583       18       17.43  
Center Promenade
    0.9       98.3       2,988       64       17.38  
1000 Town Center
    0.6       94.8       2,119       9       20.76  
Solar Drive Business Center
    0.7       100.0       2,300       37       17.64  
Camarillo Business Park
    0.8       91.9       2,809       24       19.82  
 
   
     
     
     
     
 
 
Subtotal/Weighted Average —
Ventura & Kern Counties
    4.1 %     96.7 %   $ 13,898       165     $ 18.46  
Riverside and San Bernardino Counties
                                       
Centrelake Plaza
    0.6 %     98.5 %   $ 2,530       22     $ 23.21  
Tower Plaza Retail
    0.7       91.2       1,475       24       12.12  
Chicago Avenue Business Park
    0.3       92.7       660       8       14.99  
Havengate Center
    0.4       94.5       1,303       18       17.11  
HDS Plaza
    0.5       95.8       1,824       13       18.28  
 
   
     
     
     
     
 
 
Subtotal/Weighted Average — Riverside and San Bernardino Counties
    2.5 %     94.6 %   $ 7,792       85     $ 17.29  
 
   
     
     
     
     
 
 
Portfolio Total/ Weighted Average
    100 %     91.4 %   $ 378,755       3,095     $ 21.67  
 
   
     
     
     
     
 


(1)   Calculated as monthly contractual base rent under existing leases as of December 31, 2002, multiplied by 12 and divided by leased net rentable square feet, for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.
 
(2)   We lease the land underlying these properties or their parking structures pursuant to long term ground leases.
 
(3)   This property was sold on March 11, 2003 for approximately $32.5 million.

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  Tenant Information

     As of December 31, 2002, we had over 3,000 tenants, with no one tenant representing more than 2.2% of the aggregate annualized base rent of our properties, and only 4 tenants individually representing more than 1.0% of our aggregate annualized base rent. Our properties are leased to local, national and foreign companies engaged in a variety of businesses including financial services, entertainment, health care services, accounting, law, education, publishing and local, state and federal government entities.

     Our leases are typically structured for terms of three to ten years. Leases typically contain provisions permitting tenants to renew expiring leases at prevailing market rates. Approximately 79% of our total rentable square footage is under full service gross leases under which tenants typically pay for all real estate taxes and operating expenses above those for an established base year or expense stop. Our remaining square footage is under triple net and modified gross leases. Triple net and modified gross leases are those where tenants pay not only base rent, but also some or all real estate taxes and operating expenses of the leased property. Tenants generally reimburse us the full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for on-site monthly employee and visitor parking. We are generally responsible for structural repairs.

     The following table presents information as of December 31, 2002 derived from our ten largest tenants based on the percentage of aggregate portfolio annualized base rent:

                                                 
            Weighted                                
            Average   Percentage of   Percentage of                
            Remaining   Aggregate   Aggregate                
            Lease   Portfolio   Portfolio           Annualized
    Number of   Term In   Leased   Annualized   Net Rentable   Base Rent
Tenant   Leases   Months   Square Feet   Base Rent(1)   Square Feet   ($000's)

 
 
 
 
 
 
Vivendi Universal
    4       88       1.32 %     2.14 %     231,681     $ 8,111  
State of California
    41       46       1.99       1.93       347,626       7,322  
University of Phoenix
    20       22       1.44       1.32       251,293       4,982  
Univision Television Group, Inc.
    2       226       0.95       1.12       166,363       4,247  
Ceridian Corporation
    5       80       0.92       0.95       160,805       3,589  
U.S. Government
    24       43       0.78       0.84       136,158       3,192  
SBC Communications, Inc.
    8       28       0.83       0.83       144,927       3,140  
Verizon Communications, Inc.
    8       20       0.90       0.70       156,612       2,659  
Atlantic Richfield
    13       44       0.72       0.70       126,830       2,659  
Boeing
    2       34       1.56       0.68       272,013       2,565  
 
   
     
     
     
     
     
 
Total/Weighted Average (2)
    127       60       11.41 %     11.21 %     1,994,308     $ 42,466  
 
   
     
     
     
     
     
 
(1)   Annualized base rent is calculated as monthly contractual base rent under existing leases as of December 31, 2002, multiplied by 12; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.
 
(2)   The weighted average calculation is based on net rentable square footage leased by each tenant.

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     The following table presents the diversification of the tenants occupying space in our portfolio by industry as of December 31, 2002:

                                 
                            Percentage
                            of
                    Occupied   Total
            NAICS   Square   Occupied
North American Industrial Classification System Description   Code   Feet   Portfolio

 
 
 
Professional, Scientific, and Technical Services:
                       
   
Legal Services
    5411       1,232,234       7.15 %
   
Accounting & Tax Preparation, Bookkeeping and Payroll Services
    5412       665,891       3.86  
 
Management, Scientific and Technical Consulting Services
    5416       716,168       4.15  
 
Other Services
            1,792,026       10.40  
   
 
           
     
 
     
Subtotal
    541       4,406,319       25.56  
Finance and Insurance
    521-525       2,740,244       15.90  
Information
    511-519       2,156,850       12.51  
Manufacturing
    311-339       1,446,481       8.39  
Health Care and Social Assistance
    621-624       1,296,418       7.52  
Administrative and Support and Waste Management and Remediation Services
    561-562       799,288       4.64  
Public Administration
    921-928       747,784       4.34  
Educational Services
    611       700,114       4.06  
Real Estate, Rental and Leasing
    531-533       715,417       4.15  
Wholesale Trade
    423-425       531,102       3.08  
Transportation and Warehousing
    481-493       388,299       2.25  
Arts, Entertainment, and Recreation
    711-713       327,520       1.90  
Construction
    236-238       236,908       1.37  
Accommodation and Food Services
    721-722       195,362       1.13  
Other Services (except Public Administration)
    811-814       171,012       0.99  
Retail Trade
    441-454       131,117       0.76  
Mining
    211-213       85,272       0.49  
Management of Companies and Enterprises
    551       21,970       0.13  
Utilities
    221       8,795       0.05  
Agriculture, Forestry, Fishing and Hunting
    111-115       6,065       0.04  
Non-classified
  Other     125,754       0.74  
   
 
           
     
 
     
Total Square Feet Occupied
            17,238,091       100.00 %
   
 
           
     
 

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     Lease Distribution

     The following table presents information relating to the distribution of the leases for our 136 stabilized properties, based on leased net rentable square feet, as of December 31, 2002:

                                                           
                              Percent           Average   Percent of
                              of Aggregate   Annualized   Annualized   Aggregate
      Number   Percent   Total   Portfolio   Base Rent   Base Rent   Portfolio
      of   of All   Leased   Leased   of Leases(1)   per Leased   Annualized
Square Feet Under Lease   Leases   Leases   Square Feet   Square Feet   ($000s)   Square Foot   Base Rent

 
 
 
 
 
 
 
2,500 and under
    1,558       50.34 %     2,154,167       12.32 %   $ 51,758     $ 24.03       12.68 %
2,501 - 5,000
    716       23.13 %     2,508,078       14.35 %     61,364       24.47       15.03 %
5,001 - 7,500
    274       8.85 %     1,668,800       9.55 %     41,384       24.80       10.14 %
7,501 - 10,000
    176       5.69 %     1,535,484       8.78 %     36,982       24.08       9.06 %
10,001 - 20,000
    234       7.56 %     3,289,906       18.82 %     79,717       24.23       19.52 %
20,001 - 40,000
    76       2.46 %     2,103,724       12.03 %     47,149       22.41       11.55 %
40,001 and over
    61       1.97 %     4,220,717       24.15 %     89,948       21.31       22.02 %
 
   
     
     
     
     
     
     
 
 
Total/Weighted Average
    3,095       100.00 %     17,480,876       100.00 %   $ 408,302     $ 23.36       100.00 %
 
   
     
     
     
     
     
     
 


(1)   Base rent is determined as of the date of lease expiration, including all fixed contractual base rent increases; increases tied to indices such as the Consumer Price Index are not included.

  Lease Expirations

     The following table presents a summary schedule of the total lease expirations for our 136 stabilized properties for leases in place at December 31, 2002. This table assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations:

                                                   
              Square   Percentage   Annualized   Average
Annualized
       
              Footage   of Aggregate   Base Rent   Base Rent per   Percentage of
      Number of   of   Portfolio   of Expiring   Square Foot of   Aggregate Portfolio
      Leases   Expiring   Leased   Leases(1)   Expiring   Annualized
Year of Lease Expiration   Expiring   Leases   Square Feet   ($000s)   Leases   Base Rent

 
 
 
 
 
 
Month-to-Month
    123       285,197       1.63 %     5,069     $ 17.77       1.24 %
Q1 2003
    147       545,036       3.12 %     11,182       20.52       2.74 %
Q2 2003
    150       557,627       3.19 %     11,075       19.86       2.71 %
Q3 2003
    175       782,242       4.47 %     16,032       20.50       3.93 %
Q4 2003
    168       792,008       4.53 %     17,269       21.80       4.23 %
 
   
     
     
     
     
     
 
 
2003 Sub-Total(2)
    640       2,676,913       15.31 %     55,558       20.75       13.61 %
2004
    665       3,487,812       19.96 %     73,346       21.03       17.96 %
2005
    618       3,251,717       18.60 %     70,907       21.81       17.37 %
2006
    368       2,203,854       12.61 %     51,955       23.57       12.72 %
2007
    328       1,792,555       10.26 %     44,098       24.60       10.80 %
2008
    114       1,149,101       6.57 %     29,789       25.92       7.30 %
2009
    52       517,603       2.96 %     13,211       25.52       3.24 %
2010
    58       741,905       4.24 %     20,010       26.97       4.90 %
2011
    28       458,249       2.62 %     18,148       39.60       4.44 %
2012
    33       457,171       2.62 %     12,958       28.34       3.17 %
2013+
    68       458,799       2.62 %     13,253       28.89       3.25 %
 
   
     
     
     
     
     
 
 
Total/Weighted Average
    3,095       17,480,876       100.00 %     408,302     $ 23.36       100.00 %
 
   
     
     
     
     
     
 


(1)   Base rent is determined as of the date of lease expiration, including all fixed contractual base rent increases; increases tied to indices such as the Consumer Price Index are not included.
 
(2)   Excludes month-to-month leases.

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ITEM 3. Legal Proceedings

     We are presently subject to various lawsuits, claims and proceedings arising in the ordinary course of business none of which if determined unfavorably to us is expected to have a material adverse effect on our cash flows, financial condition or results of operations except as described below.

     In December 2001, the owner of the entertainment center at our Howard Hughes Center project asserted a claim against us for indemnification arising out of a Los Angeles Superior Court judgment against them which invalidated a transfer of in-lieu credits that Arden Realty made in August of 1999 as part of our sale of the land for the entertainment center. The value of these in-lieu credits was approximately $6.0 million and were transferred to satisfy certain Transportation Impact Assessment fees related to the entertainment center. On January 17, 2003, the California Court of Appeal reversed the Superior Court’s judgment, rendering the indemnification claim moot. On January 23, 2003, the plaintiff in the original lawsuit filed a petition for rehearing with the California Court of Appeal. On February 8, 2003 the California Court of Appeal denied the petition for rehearing.

     Based on our review of the current facts and circumstances and advice of our outside counsel, we are not able to express an opinion as to the ultimate outcome of this matter. However, we do not believe that the resolution of this matter or any of our ongoing legal proceedings will have a material adverse effect on our consolidated results of operations, cash flows or financial position.

ITEM 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of Arden Realty’s stockholders during the fourth quarter of the year ended December 31, 2002.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     There is no established trading market for our common equity. As of December 31, 2002, there were 64,701,042 common OP Units outstanding, of which Arden Realty owned 62,984,217 common OP Units, all of which correspond to the issued and outstanding common stock of Arden Realty. A partner’s percentage is determined by dividing the number of common OP Units held by the partner by the total number of common OP Units outstanding. As of December 31, 2002, there were approximately 34 holders of our common OP Units, including Arden Realty.

     Set forth below are the distributions per common OP Unit paid during our two most recent fiscal years.

         
    Distributions
    Paid
   
2001
       
First Quarter
  $ 0.465  
Second Quarter
  $ 0.49  
Third Quarter
  $ 0.49  
Fourth Quarter
  $ 0.49  
2002
       
First Quarter
  $ 0.49  
Second Quarter
  $ 0.505  
Third Quarter
  $ 0.505  
Fourth Quarter
  $ 0.505  

     We make quarterly distributions to our common OP Unit holders at the discretion of Arden Realty, our sole general partner. The amount of each quarterly distribution depends on our funds from operations, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as Arden Realty deems relevant.

     ITEM 6. Selected Financial Data

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     You should read the following consolidated financial and operating data together with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this Form 10-K.

                                           
      Year Ended December 31,
     
      2002   2001   2000   1999   1998
     
 
 
 
 
      (in thousands, except ratio and per share amounts)
Operating Data:
                                       
Revenues
  $ 414,596     $ 417,426     $ 384,149     $ 336,514     $ 280,497  
Property operating expenses
    129,723       121,086       109,512       100,303       85,622  
General and administrative expense
    11,804       11,083       8,306       6,753       6,264  
Depreciation and amortization
    110,202       100,775       85,947       69,215       51,420  
 
   
     
     
     
     
 
 
    162,867       184,482       180,384       160,243       137,191  
Interest expense
    (88,516 )     (84,195 )     (78,406 )     (60,239 )     (43,403 )
 
   
     
     
     
     
 
Income from continuing operations before gain on sale of properties and minority interest
    74,351       100,287       101,978       100,004       93,788  
Gain on sale of properties
    1,967       4,591       2,132              
 
   
     
     
     
     
 
Income from continuing operations before minority interest
    76,318       104,878       104,110       100,004       93,788  
Minority interest
    (110 )     (127 )     (144 )     (169 )     (729 )
 
   
     
     
     
     
 
Income from continuing operations
    76,208       104,751       103,966       99,835       93,059  
Discontinued operations
    1,455       1,506       1,243       2,558       2,735  
 
   
     
     
     
     
 
Net income
  $ 77,663     $ 106,257     $ 105,209     $ 102,393     $ 95,794  
 
   
     
     
     
     
 
Net income allocated to:
                                       
 
Preferred partner
  $ 4,312     $ 4,312     $ 4,312     $ 1,354     $  
 
   
     
     
     
     
 
 
General and limited partners
  $ 73,351     $ 101,945     $ 100,897     $ 101,039     $ 95,794  
 
   
     
     
     
     
 
Basic net income per common operating partnership unit:
                                       
 
Income from continuing operations
  $ 1.09     $ 1.53     $ 1.52     $ 1.50     $ 1.50  
 
Income from discontinued operations
    0.02       0.02       0.02     $ 0.04     $ 0.05  
 
   
     
     
     
     
 
Net income per common operating partnership unit-basic
  $ 1.11     $ 1.55     $ 1.54     $ 1.54     $ 1.55  
 
   
     
     
     
     
 
Weighed average number of common operating partnership units-basic
    65,898       65,872       65,568       65,509       61,846  
 
   
     
     
     
     
 
Diluted net income per common operating partnership unit:
                                       
 
Income from continuing operations
  $ 1.09     $ 1.52     $ 1.51     $ 1.50     $ 1.50  
 
Income from discontinued operations
    0.02       0.02       0.02     $ 0.04     $ 0.05  
 
   
     
     
     
     
 
Net income per common operating partnership unit-diluted
  $ 1.11     $ 1.54     $ 1.53     $ 1.54     $ 1.55  
 
   
     
     
     
     
 
Weighed average number of common operating partnership units-diluted
  $ 66,098     $ 66,132     $ 65,759     $ 65,566     $ 61,999  
 
   
     
     
     
     
 
Distribution per common operating partnership unit
  $ 2.01     $ 1.94     $ 1.84     $ 1.76     $ 1.66  
 
   
     
     
     
     
 
Other Data:
                                       
Cash provided by operating activities
  $ 214,356     $ 204,839     $ 194,258     $ 170,495     $ 150,410  
Cash used in investing activities
    (227,224 )     (115,854 )     (216,024 )     (283,574 )     (1,099,833 )
Cash (used in) provided by financing activities
    (20,090 )     (57,376 )     20,142       115,557       948,701  
Funds from Operations (1)
    182,801       199,173       186,032       171,323       148,237  
EBITDA (2)
    275,739       287,807       268,894       232,638       191,748  
Ratio of earnings to fixed charges (3)(4)
    1.69       1.95       1.93       2.28       2.66  
Ratio of EBITDA to interest expense (2)
    3.12       3.42       3.43       3.86       4.42  
Ratio of EBITDA to fixed charges (2)(3)
    2.80       2.95       2.82       3.27       3.66  


Selected financial data continues on next page

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    December 31,
   
    2002   2001   2000   1999   1998
   
 
 
 
 
Balance Sheet Data:
                                       
Net investment in real estate
  $ 2,741,624     $ 2,622,980     $ 2,603,566     $ 2,479,111     $ 2,260,433  
Total assets
    2,835,837       2,763,701       2,706,967       2,572,904       2,333,866  
Total indebtedness
    1,402,304       1,251,483       1,177,769       1,029,656       840,377  
Other liabilities
    76,350       62,685       56,885       50,555       35,720  
Total Partners’ Capital
    1,354,399       1,446,667       1,469,402       1,489,740       1,454,844  


(1)   We believe that funds from operations, or FFO, is a useful supplemental measure of our operating performance. We compute FFO in accordance with standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NARIET, in April 2002. The white paper defines FFO as net income or loss computed in accordance with generally accepted accounting principles, or GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
 
    We believe that FFO, by excluding depreciation costs, the gains or losses from the sale of operating real estate properties and extraordinary items as defined by GAAP, provides an additional perspective on our operating results. However, because these items have real economic effect, FFO is a limited measure of performance.
 
    FFO captures trends in occupancy rates, rental rates and operating costs. FFO excludes depreciation and amortization costs and it does not capture the changes in value in our properties that result from use or changes in market conditions or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Therefore, its ability to measure performance is limited.
 
    Because FFO excludes significant economic components of net income determined in accordance with GAAP, FFO should be used as an adjunct to net income and not as an alternative to net income. FFO should also not be used as an indicator of our financial performance, or as a substitute for cash flow from operating activities determined in accordance with GAAP or as a measure of our liquidity. FFO is not by itself indicative of funds available to fund our cash needs, including our ability to pay dividends or service or debt. Therefore, FFO only provides investors with additional performance measure that when combined with measures computed in accordance with GAAP such as net income, cash flow from operating activities, investing activities and financing activities provides investors with an indication of our ability to service debt and to fund acquisitions and other expenditures.
 
    FFO is used by investors to compare our performance with other real estate companies. Other real estate companies may use different methodologies for calculating FFO and, accordingly, our FFO may not be comparable to other real estate companies. See reconciliation of FFO to net income in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report.
 
(2)   Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP measurement. EBITDA is presented because we believe this data is used by investors as an indication of our ability to meet our debt service requirements. We consider that EBITDA, when combined with other measures, can be a useful measure to determine our ability to service debt and fund future capital expenditure requirements. However, due to the significance of the net income components excluded from EBITDA, it should not be considered an alternative to net income, cash flow from operations, or any other operating or liquidity performance measure prescribed by GAAP.
 
    Because interest expense, taxes, gains or losses on sales of property, losses on valuations of derivatives, asset impairment losses, cumulative effect of a change in accounting principle, extraordinary items as defined by GAAP and depreciation and amortization costs, which are not reflected in EBITDA, have been, will be or may be incurred by us, investors are cautioned to reflect our ability to finance our investments at competitive borrowing costs, successfully maintain Arden Realty’s REIT status, acquire and dispose of real estate properties at favorable prices to us and also reflect changes in value in our properties that result from use or changes in market conditions and the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties.
 
    We present the ratio of EBITDA to interest expense and the ratio of EBITDA to fixed charges because these ratios are used in several financial covenants contained in our principal loan agreements. We are required to satisfy these financial covenants each fiscal quarter. We believe this information is useful to investors because investors can use this data to (1) confirm that we are in compliance with the ratio covenants of our principal loan agreements, (2) evaluate our ability to service our debt, (3) evaluate our ability to fund future capital expenditures, and (4) compare our ratios to other real estate companies that present similar ratios, including other REITs. These ratios should not be considered as alternatives to the ratio of earnings to fixed charges.
 
    The reader is cautioned that EBITDA, as calculated by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly the same as we do.

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     We calculate EBITDA as follows:

                                             
        Year Ended December 31,
       
        2002   2001   2000   1999   1998
       
 
 
 
 
Income from continuing operations before gain on sale of properties and minority interest
  $ 74,351     $ 100,287     $ 101,978     $ 100,004     $ 93,788  
Add:
                                       
 
Interest expense
    88,516       84,195       78,406       60,239       43,403  
 
Depreciation and amortization
    110,202       100,775       85,947       69,215       51,420  
 
Discontinued operations
    1,455       1,506       1,243       2,558       2,735  
 
Depreciation from discontinued operations
    1,215       1,044       1,320       622       402  
 
   
     
     
     
     
 
EBITDA
  $ 275,739     $ 287,807     $ 268,894     $ 232,638     $ 191,748  
 
   
     
     
     
     
 

(3)   Fixed charges consist of interest costs, whether expensed or capitalized, amortization of deferred financing costs, amortization of discounts or premiums related to indebtedness and preferred unit distributions.
 
(4)   The ratios of earnings to fixed charges were computed by dividing earnings by fixed charges. For this purpose, earnings have been calculated by adding fixed charges, excluding capitalization interest and preferred unit distributions, to income or loss before extraordinary items.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  Overview

     The following discussion should be read in conjunction with Item 6, Selected Financial Data, and our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

     We are a self-administered and self-managed real estate organization that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are managed by 8 senior executive officers who have experience in the real estate industry ranging from 11 to 33 years and who collectively have an average of 19 years of experience. We perform all property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions with our staff of approximately 300 employees.

     As of December 31, 2002, Arden Realty was Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio consisted of 137 primarily suburban office properties and 223 buildings containing approximately 19.4 million net rentable square feet including one development property with approximately 283,000 net rentable square feet under lease-up. As of December 31, 2002, our properties were 90.1% occupied.

     Our primary business strategy is to actively manage our portfolio to seek to achieve gains in rental rates and occupancy, control operating expenses and to maximize income from ancillary operations and services. When market conditions permit, we may also selectively develop or acquire new properties that add value and fit strategically into our portfolio. We may also sell existing properties and redeploy the proceeds into investments that we believe will generate higher long-term value.

  Critical Accounting Policies

Revenue Recognition

     Minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, is recognized on a straight-line basis over the term of the related lease.

Allowance for Rents and Other Receivables

     We periodically evaluate the collectibility of amounts due from tenants and 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 receivable that arises from the straight-lining of rents. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates. If estimates differ from actual results this could impact our operating results.

Commercial Properties

     Our properties are stated at depreciated cost. Write-downs to estimated fair value are recognized whenever a property’s estimated undiscounted future cash flows are less than its book value. We carry properties held for disposition at the lower of their depreciated cost or fair value less cost to sell. Based on our assessment, no write-downs to estimated fair value were necessary as of December 31, 2002 and 2001, respectively.

     Upon acquisition of real estate, we assess the fair value of the acquired assets (including land, buildings, tenant improvements and operating leases adjusted for origination costs) and allocate purchase price based on these assessments.

     Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development related costs incurred during construction periods are capitalized and depreciated on the same basis as the related asset.

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     Repair and maintenance costs are charged to expenses as incurred and significant replacements and betterments are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of a an asset or increase its operating efficiency. Significant replacements and betterments represent costs that extend an asset’s useful life or increase its operating efficiency.

Depreciation

     Depreciation is calculated under the straight-line method using depreciable lives of ten to forty seven years for building and building improvements and five-year lives for furniture, fixtures and equipment. Amortization of tenant improvements is calculated using the straight-line method over the term of the related lease.

Qualification as a REIT

     Since our taxable year ended December 31, 1996, Arden Realty has been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. Arden Realty’s qualification and taxation as a REIT depends on its 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 Internal Revenue Code provisions subject to interpretation.

     If Arden Realty, our sole general partner, failed to qualify as a REIT in any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, Arden Realty also would be disqualified as a REIT for the four taxable years following the year during which qualification was lost. For additional information see “Risk Factors - We may suffer adverse tax consequences and be unable to attract capital if Arden Realty fails to qualify as a REIT,” and “We intend to qualify as a partnership, but we cannot guarantee that we will qualify,” elsewhere in this Form 10-K.

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     Results Of Operations

     Our financial position and operating results are primarily comprised of our portfolio of properties and income derived from those properties. Therefore, the comparability of financial data from period to period will be affected by the timing of significant property development, acquisitions and dispositions.

Comparison of the year ended December 31, 2002 to the year ended December 31, 2001
(in thousands, except number of properties and percentages)

                                         
            Year Ended December 31,            
           
          Percent
            2002   2001   Change(1)   Change
           
 
 
 
 
Revenue from rental operations:
                               
     
Scheduled cash rents
  $ 352,682     $ 343,224     $ 9,458       3 %
     
Straight-line rents
    5,348       9,120       (3,772 )     (41 )
     
Tenant reimbursements
    24,968       22,683       2,285       10  
     
Parking, net of expense
    20,814       21,256       (442 )     (2 )
     
Other rental operations
    8,242       18,202       (9,960 )     (55 )
     
 
   
     
     
     
 
       
Total revenue from rental operations
    412,054       414,485       (2,431 )     (1 )
   
Property expenses:
                               
     
Repairs and maintenance
    39,422       36,151       3,271       9  
     
Utilities
    35,726       33,579       2,147       6  
     
Real estate taxes
    29,921       29,089       832       3  
     
Insurance
    8,116       5,685       2,431       43  
     
Ground rent
    895       1,885       (990 )     (53 )
     
Administrative
    15,643       14,697       946       6  
     
 
   
     
     
     
 
       
Total property expenses
    129,723       121,086       8,637       7  
     
 
   
     
     
     
 
       
Property Operating Results(2)
    282,331       293,399       (11,068 )     (4 )
     
General and administrative
    11,804       11,083       721       7  
     
Interest
    88,516       84,195       4,321       5  
     
Depreciation and amortization
    110,202       100,775       9,427       9  
     
Interest and other income
    (2,542 )     (2,941 )     (399 )     (14 )
     
 
   
     
     
     
 
     
Income from continuing operations before gain on sale of properties and minority interest
  $ 74,351     $ 100,287     $ (25,936 )     (26 )%
     
 
   
     
     
     
 
     
Discontinued operations(3)
  $ 1,455     $ 1,506     $ (51 )     (3 )%
     
 
   
     
     
     
 
Other Data:
                               
Number of properties:
                               
     
Acquired during period
    5                        
     
Completed and placed in service during period
    1       1                  
     
Disposed of during period
    (3 )     (10 )                
     
Owned at end of period
    136 (4)     133                  
Net rentable square feet:
                               
     
Acquired during period
    803                        
     
Completed and placed in service during period
    287       162                  
     
Disposed of during period
    (205 )     (573 )                
     
Owned at end of period
    19,132 (4)     18,247                  



(1)   Variances for Revenue from Rental Operations and Property Operations Expenses are discussed as part of Properties Owned for all of 2001 and 2002 below.
 
(2)   Property Operating Results are discussed as part of Variances for Revenue from Rental Operations and Property Operating Expenses below.
 
(3)   Discontinued operations for 2001 and 2002 are discussed below.
 
(4)   Excludes one development property containing approximately 283,000 net rentable square feet currently under lease-up.

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     Interest and other income decreased by approximately $399,000 or 14%, in 2002 as compared to 2001, primarily due to lower interest income earned in 2002 from our restricted cash balances required by mortgage loans on lower effective interest rates in 2002. The decrease in interest income was partially offset by the early repayment of our mortgage notes receivable in October 2002 which resulted in approximately $375,000 higher net interest income from these notes.

     General and administrative expenses increased approximately $721,000 or 7%, in 2002 as compared to 2001. This increase was primarily due to non-recurring costs resulting from employee separation costs and higher external legal and accounting costs.

     Interest expense increased approximately $4.3 million or 5%, in 2002 as compared to 2001. This increase was primarily due to an increase in borrowings in 2002 for property acquisitions and lower interest capitalized in 2002. Capitalized interest in 2002 was lower as we ceased capitalizing interest on our 6080 Center Drive property in May 2002. The increase in interest expense was partially offset by lower effective interest rates in 2002.

     Depreciation and amortization expense increased by approximately $9.4 million or 9%, in 2002 as compared to 2001. The increase was primarily due to depreciation related to two newly developed properties placed in service since the fourth quarter of 2001, five properties acquired during 2002 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001 for which no depreciation expense was recorded in 2001 while classified as held for sale.

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Variances for Revenue from Rental Operations and Property Operating Expenses

     The decrease in revenue from rental operations and increase in property operating expenses in 2002 as compared to 2001 was primarily due to a 2.2% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 128 properties that we owned as part of continuing operations for all of 2001 and 2002.

     Following is a summary of the increase in revenue from rental operations and property operating expenses that relates to the 20 properties that were either sold, acquired or placed in service after January 1, 2001, and for the 128 non-development properties we owned for all of 2001 and 2002 (in thousands, except number of properties).

                           
              Properties Sold,        
              Acquired,   Non-Development
              Placed in Service or   Properties Owned
              Under Development   for all of
      Total Variance (1)   after January 1, 2001   2001 and 2002(2)
     
 
 
Revenue from Rental Operations:
                       
 
Scheduled cash rents
  $ 9,458     $ 7,729     $ 1,729  
 
Straight-line rents
    (3,772 )     919       (4,691 )
 
Tenant reimbursements
    2,285       1,829       456  
 
Parking, net of expense
    (442 )     (76 )     (366 )
 
Other rental operations
    (9,960 )     (3,014 )     (6,946 )
 
 
   
     
     
 
 
  $ (2,431 )   $ 7,387     $ (9,818 )
 
 
   
     
     
 
Property Expenses:
                       
 
Repairs and maintenance
    3,271       1,551       1,720  
 
Utilities
    2,147       581       1,566  
 
Real estate taxes
    832       1,273       (441 )
 
Insurance
    2,431       168       2,263  
 
Ground rent
    (990 )           (990 )
 
Administrative
    946       130       816  
 
 
   
     
     
 
 
  $ 8,637     $ 3,703     $ 4,934  
 
 
   
     
     
 
Other Data:
                       
 
Number of properties
            20       128  
 
Net rentable square feet
            2,030       17,740  

(1)   The components outlined above comprise our Property Operating Results. This measure is commonly used by investors to evaluate the performance of real estate companies, to determine trends in earnings and to compute the fair value of properties as it is not affected by (1) the cost of funds of the property owner or (2) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP. The first factor is commonly eliminated from net income because it is specific to the particular financing capabilities and constraints of the owner. The second factor is commonly eliminated because it may not accurately represent the actual change in value in real estate properties that result from use or changes in market conditions. We believe that eliminating these costs from net income gives investors an additional measure of operating performance that, when used as an adjunct to net income computed in accordance with GAAP, can be a useful measure of our operating results.
 
    Property Operating Results captures trends in occupancy rates, rental rates and operating costs. However, Property Operating Results excludes general and administrative costs, interest expense, interest income, depreciation and amortization expense and gains or losses from the sale of properties, changes in value in our real estate properties that result from use or permanent impairment to carrying costs as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Therefore, Property Operating Results may fail to capture significant trends which limits its usefulness.
 
    Property Operating Results is a non-GAAP measure of performance. Property Operating Results is not a substitute for net income as computed in accordance with GAAP. It excludes significant expense components such as depreciation and amortization expense and financing costs. This measure should be analyzed in conjunction with net income and cash flow from operating activities as computed in accordance with GAAP. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

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    The following is a reconciliation of income from continuing operations before gain on sale of properties and minority interest to Property Operating Results:

                           
      Year Ended December 31,
     
      2002   2001   2000
     
 
 
              ($000's)        
Income from continuing operations before gain on sale of properties and interest
  $ 74,351     $ 100,287     $ 101,978  
Add:
                       
 
General and administrative expense
    11,804       11,083       8,306  
 
Interest expense
    88,516       84,195       78,406  
 
Depreciation and amortization
    110,202       100,775       85,947  
Less:
                       
 
Interest and other income
    (2,542 )     (2,941 )     (3,527 )
 
   
     
     
 
Property Operating Results
  $ 282,331     $ 293,399     $ 271,110  
 
   
     
     
 

(2)   The operating results for properties included in continuing and discontinued operations that were owned for all of 2001 and 2002 are discussed below.

Discontinued Operations

     We adopted Statement of Financial Accounting Standards No. 144, (SFAS 144), effective January 1, 2002, which requires, among other things, that the operating results of real estate properties classified as held for disposition subsequent to January 1, 2002 be included in discontinued operations in the statements of income for all periods presented. The table below summarizes the operating results of our one property currently classified as discontinued operations.

     The results of operations for one property held for disposition as of December 31, 2002 and classified as discontinued operations for the years ended December 31, 2002 and 2001 are as follows (in thousands, except number of properties):

                                     
        Year Ended December 31,            
       
          Percent
        2002   2001   Change   Change
       
 
 
 
Discontinued Operations:
                               
   
Revenues
  $ 4,165     $ 4,040     $ 125       3 %
   
Property operating expenses
    1,495       1,490       5        
   
 
   
     
     
     
 
 
    2,670       2,550       120       5  
   
Depreciation and amortization
    1,215       1,044       171       16  
   
 
   
     
     
     
 
   
Discontinued operations
  $ 1,455     $ 1,506     $ (51 )     (3 )%
   
 
   
     
     
     
 
Other Data:
                               
 
Number of properties
    1       1                  
 
Net rentable square feet
    140       140                  

The operating results for discontinued operations are discussed as part of Properties Owned for all of 2001 and 2002 below.

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Properties Owned for all of 2001 and 2002

     Following is a comparison of property operating data for the 129 non-development properties we owned for all of 2001 and 2002 reported in continuing and discontinued operations (in thousands, except number of properties and percentages):

                                 
    Year Ended                
    December 31,                
   
  Dollar   Percent
    2002   2001   Change   Change
   
 
 
 
Revenue from rental operations
  $ 391,893     $ 401,586     $ (9,693 )     (2 )%
Property expenses
    123,700       118,761       4,939       4  
 
   
     
     
     
 
 
  $ 268,193     $ 282,825     $ (14,632 )     (5 )%
 
   
     
     
     
 
Straight-line rents
  $ 3,412     $ 8,074                  
 
   
     
                 
Number of properties
    129       129                  
Average occupancy
    91.1 %     93.3 %                
Net rentable square feet
    17,880       17,880                  

     Revenue from rental operations for these properties decreased by approximately $9.7 million, or 2%, in 2002 as compared to 2001. The decrease was due to a $6.8 million decrease in revenue from other rental operations, a $4.7 million decrease in straight-line rents and a $390,000 decrease in parking income that was partially offset by an approximate $1.7 million increase in scheduled cash rents and a $471,000 increase in tenant reimbursements. The decrease in revenue from other rental operations was primarily attributable to decreases in lease termination settlements in 2002, while straight-line rents decreased primarily due to the turning over of straight-line rents for older leases throughout our same store portfolio. Parking income decreased due to the 2.2% decline in average occupancy. Scheduled cash rents increased primarily due to scheduled rent increases and rental rate growth attained on new and renewed leases which were partially offset by the decline in average occupancy. Tenant reimbursements increased primarily due to recovery billings for higher operating expenses in 2002 as discussed below.

     Property expenses for these properties increased by approximately $4.9 million, or 4%, in 2002 as compared to 2001. The increase was primarily due to a $2.3 million increase in insurance expense in 2002, a $1.7 million increase in repairs and maintenance and a $1.6 million increase in utility expenses which were partially offset by a $990,000 decrease in ground rent expense. The increase in insurance expense was due to increases in industry-wide rates in 2002 and premiums related to a $100 million terrorism insurance policy entered into in the second quarter of 2002. Repairs and maintenance expense increased in 2002 primarily due to higher janitorial costs while utility costs increased due to rate increases enacted in May 2001. Ground rent expense decreased in 2002 due to lower operating income from one of our properties with a participating ground lease.

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Comparison of the year ended December 31, 2001 to the year ended December 31, 2000
(in thousands, except number of properties and percentages)

                                       
          Year Ended December 31,                
         
          Percent
          2001   2000   Change(1)   Change
         
 
 
 
  Revenue from rental operations:                                
   
Scheduled cash rents
  $ 343,224     $ 317,413     $ 25,811       8 %
   
Straight-line rents
    9,120       7,920       1,200       15  
   
Tenant reimbursements
    22,683       16,454       6,229       38  
   
Parking, net of expense
    21,256       17,575       3,681       21  
   
Other rental operations
    18,202       21,260       (3,058 )     (14 )
 
   
     
     
     
 
     
Total revenue from rental operations
    414,485       380,622       33,863       9  
  Property expenses:                                
   
Repairs and maintenance
    36,151       34,874       1,277       4  
   
Utilities
    33,579       29,598       3,981       13  
   
Real estate taxes
    29,089       26,362       2,727       10  
   
Insurance
    5,685       4,171       1,514       36  
   
Ground rent
    1,885       1,214       671       55  
   
Administrative
    14,697       13,293       1,404       11  
 
   
     
     
     
 
     
Total property expenses
    121,086       109,512       11,574       11  
 
   
     
     
     
 
     
Property operating results
    293,399       271,110       22,289       8  
   
General and administrative
    11,083       8,306       2,777       33  
   
Interest
    84,195       78,406       5,789       7  
   
Depreciation and amortization
    100,775       85,947       14,828       17  
   
Interest and other income
    (2,941 )     (3,527 )     (586 )     (17 )
 
   
     
     
     
 
   
Income from continuing operations before gain on sale of properties and minority interest
  $ 100,287     $ 101,978     $ (1,691 )     (2 )%
   
 
   
     
     
     
 
   
Discontinued operations(2)
  $ 1,506     $ 1,243     $ 263       21 %
   
 
   
     
     
     
 
Other Data:
                               
 
Number of properties:
                               
   
Acquired during period
                           
   
Completed and placed in service during period
    1       1                  
   
Disposed of during period
    (10 )     (1 )                
   
Owned at end of period
    133 (3)     142                  
 
Net rentable square feet:
                               
   
Acquired during period
                           
   
Completed and placed in service during period
    162       242                  
   
Disposed of during period
    (573 )     (76 )                
   
Owned at end of period
    18,247 (3)     18,658                  

(1)   Variances for Revenue from Rental Operations and Property Operating Expenses are discussed as part of Properties Owned for all of 2000 and 2001 below.
 
(2)   Discontinued operations for 2000 and 2001 are discussed below.
 
(3)   Excludes two development properties containing approximately 586,000 net rentable square feet.

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     Interest and other income decreased by approximately $586,000 or 17%, in 2001 as compared to 2000, primarily due to lower interest income earned in 2001 from our restricted cash balances required by mortgage loans on lower effective interest rates in 2001.

     General and administrative expenses increased approximately $2.8 million or 30%, in 2001 as compared to 2000. This increase was primarily related to higher personnel costs in 2001, including approximately $1.3 million in non-cash compensation expense from restricted stock awards granted to key executives in July and December of 2000 and July of 2001 and approximately $850,000 in salaries for employees hired after January 1, 2001.

     Interest expense increased approximately $5.8 million or 7%, in 2001 as compared to 2000. This increase was primarily due to higher outstanding balances in 2001, resulting from the funding of development, tenant improvements and leasing commission costs which was partially offset by lower effective interest rates in 2001.

     Depreciation and amortization expense increased by approximately $14.8 million or 17%, in 2001 as compared to 2000, primarily due to depreciation related to newly developed and renovated properties, capital expenditures, tenant improvements and leasing commissions placed in service subsequent to January 1, 2000, net of a decrease of approximately $10.1 million in 2001 due to a change in the estimated useful lives of certain building and building improvements.

     Variances for Revenue from Rental Operations and Property Operating Expenses

     The increase in revenue from rental operations and property operating expenses in 2001 as compared to 2000 was partially due to a development project placed in service in 2000, a development project placed in service in 2001, a property sold in 2000, five properties sold in 2001 and three properties under renovation for all or a portion of the periods presented. Operating results for properties under renovation may significantly vary from period to period depending on the status of the renovation and occupancy levels maintained during the renovation.

     Following is a summary of the increase in revenue from rental operations and property operating expenses that relates to the eleven properties that were either acquired, sold or placed in service after January 1, 2000 or were under renovation for all or a portion of the period beginning after January 1, 2000 and for the 132 non-renovation/non-development properties we owned as part of continuing operations for all of 2000 and 2001 (in thousands, except number of properties).

                           
              Properties Sold, Acquired, Placed in   Non-Renovation/Non-Development
              Service or Under Renovation/Development   Properties Owned for all of
      Total Variance   after January 1, 2000   2000 and 2001(1)
     
 
 
Revenue from Rental Operations:
                       
Scheduled cash rents
  $ 25,811     $ 11,504     $ 14,307  
 
Straight-line rents
    1,200       2,067       (867 )
 
Tenant reimbursements
    6,229       480       5,749  
 
Parking, net of expense
    3,681       1,017       2,664  
 
Other rental operations
    (3,058 )     (991 )     (2,067 )
 
   
     
     
 
 
  $ 33,863     $ 14,077     $ 19,786  
 
 
   
     
     
 
Property Expenses:
                       
Repairs and maintenance
    1,277       1,157       120  
 
Utilities
    3,981       837       3,144  
 
Real estate taxes
    2,727       1,253       1,474  
 
Insurance
    1,514       156       1,358  
 
Ground rent
    671       386       285  
 
Administrative
    1,404       302       1,102  
 
   
     
     
 
 
  $ 11,574     $ 4,091     $ 7,483  
 
 
   
     
     
 
Other Data:
                       
Number of properties
            11       132  
 
Net rentable square feet
            1,447       17,233  

(1)   The operating results for the properties included in continuing and discontinued operations that were owned for all of 2000 and 2001 are discussed below. These results also include the Temecula portfolio of five properties sold at the end of 2001 since these properties were owned for all of 2000 and 2001.

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Discontinued Operations

     We adopted SFAS 144 effective January 1, 2002, which requires, among other things, that the operating results of real estate properties classified as held for disposition subsequent to January 1, 2002 be included in discontinued operations in the statements of income for all periods presented. The table below summarizes the operating results of our one property currently classified as discontinued operations.

     The results of operations for the property held for disposition as of December 31, 2002 classified as discontinued operations for the years ended December 31, 2001 and 2000 are as follows (in thousands, except number of properties):

                                     
        Year Ended December 31,                
       
          Percent
        2001   2000   Change   Change
       
 
 
 
Discontinued Operations:
                               
 
Revenues
  $ 4,040     $ 3,968     $ 72       2 %
 
Property operating expenses
    1,490       1,405       85       6  
 
   
     
     
     
 
 
    2,550       2,563       (13 )     (1 )
 
Depreciation and amortization
    1,044       1,320       (276 )     (21 )
 
   
     
     
     
 
 
Discontinued operations
  $ 1,506     $ 1,243     $ 263       21 %
 
 
   
     
     
     
 
Other Data:
                               
 
Number of properties
    1       1                  
   
Net rentable square feet
    140       140                  

The operating results for discontinued operations are discussed as part of Properties Owned for all of 2000 and 2001 below.

Properties Owned for all of 2000 and 2001

     Following is a comparison of property operating data for the 133 non-renovation/non-development properties we owned for all of 2000 and 2001 reported in continuing and discontinued operations (in thousands, except number of properties and percentages):

                                 
    Year Ended December 31,                
   
  Dollar   Percent
    2001   2000   Change   Change
   
 
 
 
Revenue from rental operations
  $ 378,137     $ 358,279     $ 19,858       6 %
Property expenses
    113,619       106,051       7,568       7  
 
   
     
     
     
 
 
  $ 264,518     $ 252,228     $ 12,290       5 %
 
   
     
     
     
 
Straight-line rents
  $ 6,107     $ 7,044                  
 
   
     
                 
Number of properties
    133       133                  
Average occupancy
    93.8 %     94.5 %                
Net rentable square feet
    17,373       17,373                  

     Revenue from rental operations for these properties increased by approximately $19.9 million, or 6%, in 2001 as compared to 2000. Approximately $14.5 million of this difference was related to higher rental revenue in 2001. The increase in rental revenue was primarily attributable to increases in rental rates in 2001. Revenue from rental operations was also higher due to an approximate $5.9 million increase in tenant reimbursements and an approximate $2.7 million increase in parking income offset by an approximate $2.3 million decrease in revenue from other rental operations. Tenant reimbursements increased primarily due to higher operating expenses in 2001, as discussed below. Parking income increased in 2001 primarily due to increases in parking rates, while revenue from other rental operations decreased due to the timing of revenues from non-scheduled sources. Revenue from other rental operations includes after-hour utility billings, signage and lease termination settlements.

     Property expenses for these properties increased by approximately $7.6 million, or 7%, in 2001 as compared to 2000, primarily due to $3.2 million increase in utility expenses, a $1.3 million increase in real estate taxes, a $1.4 million increase in insurance expense and a $1.2 million increase in administrative expenses in 2001. The increase in utility expenses was primarily due to rate increases in 2001. Real estate taxes increased in 2001 due to normal annual increases

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and final assessments on certain properties. Insurance expense increased due to increase in industry-wide insurance rates in 2001, while administrative expenses increased primarily due to higher personnel costs in 2001. As noted above, the increase in operating expenses was the primary reason for the $5.9 million increase in tenant reimbursements.

Liquidity and Capital Resources

     Cash Flows

     Cash provided by operating activities increased by approximately $9.6 million to $214.4 million in 2002 as compared to $204.8 million in 2001. This increase was primarily due to the increased cash flows on five properties acquired in the third quarter of 2002, a reduction in tenant receivables in 2002 as a result of our collection efforts and cash flows for two development properties placed in service subsequent to January 1, 2001, all of which were partially offset by the loss of operating cash flows on ten properties sold in 2001 and three office properties sold in 2002.

     Cash used in investing activities increased by approximately $111.3 million to $227.2 million in 2002 as compared to $115.9 million in 2001. The increase was primarily due to the acquisition of five properties for approximately $135 million in the third quarter of 2002 which was partially offset by the decrease in our development activity in 2002.

     Cash used in financing activities decreased by approximately $37.3 million to an outflow of $20.1 million in 2002 as compared to an outflow of $57.4 million in 2001. This decrease in outflow was primarily due to added borrowings in 2002 under the Wells Fargo unsecured line of credit made for purposes of funding our 2002 property acquisitions, which were partially offset by the decline in funds used in 2002 in our development activity.

     Capital Commitments

     As of December 31, 2002, we had approximately $3.9 million outstanding in capital commitments related to tenant improvements, development and property-related capital expenditures. We expect to fund short term capital commitments through cash flow generated by operating activities, proceeds from asset sales or our unsecured lines of credit.

     Available Borrowings, Cash Balances and Capital Resources

     We have an unsecured line of credit with a total commitment of $10 million from City National Bank. This line of credit accrues interest at the City National Bank Prime Rate less 0.875% and is scheduled to mature on August 1, 2003. Proceeds from this line of credit are used, among other things, to provide funds for tenant improvements and capital expenditures and provide for working capital and other corporate purposes. As of December 31, 2002, there was no outstanding balance on this line of credit and $10 million was available for additional borrowings.

Financing Activities

     On June 13, 2002, we closed on a $75 million unsecured term loan with Wells Fargo. This loan matures in June 2004, has a two year extension option and bears interest at LIBOR + 1.25% during the initial term and LIBOR + 1.45% during the extension period. The proceeds from this loan were used to repay the outstanding balance on the Lehman Brothers unsecured line of credit that was scheduled to mature in July 2002. On September 25, 2002, we increased our $75 million unsecured term loan with Wells Fargo by an additional $50 million and repaid $50 million on the Wells Fargo unsecured line of credit.

     On August 9, 2002, we renewed and increased our unsecured line of credit with a group of banks led by Wells Fargo. The renewed line of credit provides for borrowings up to $310 million with an option to increase the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including an annual facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the line of credit) depending on our unsecured debt rating. This new line of credit amends the previous $275 million unsecured line of credit that was scheduled to mature in April 2003. This line of credit matures in April 2006. In addition, as long as we maintain an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby the lenders may bid on the interest rate to be charged for up to $150 million of the unsecured line of credit. We also have the option to

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convert the interest rate on this line of credit to the higher of Wells Fargo’s prime rate or the Federal Funds rate plus 0.5%.

     During the fourth quarter of 2002, we entered into interest rate swap agreements totaling $175 million that fixed the floating interest rates on $50 million of our unsecured line of credit and all of our $125 million unsecured term loan. As a result of these transactions, $50 million of our line of credit will now bear fixed interest at 4.06% through the maturity of the line in April of 2006 and the $125 million term loan will now bear interest at 3.64% in 2003, 4.18% in 2004, 4.75% in 2005 and 4.9% from January through June of 2006. As of December 31, 2002, we have an accrued liability related to the mark-to-market adjustment for these swap agreements totaling approximately $2.8 million.

Capital Recycling Program

     On March 7, 2002, we sold an approximate 64,000 square foot office property located in Torrance, California for $6.9 million. On April 16, 2002, we sold an approximate 61,000 square foot office building located in Westlake, California for $8.3 million. On May 1, 2002 we also completed the sale of an approximate 80,000 square foot office property located in Canoga Park, California for $8.4 million. The net proceeds from these dispositions were used to reduce the outstanding balance on our Wells Fargo unsecured line of credit.

     On August 6, 2002, we acquired Gateway Towers, an office property located in Torrance, California containing approximately 433,000 net rentable square feet for approximately $66 million. Gateway Towers consists of two buildings that are approximately 93% leased and includes an additional 5-acre development parcel. The funds for this acquisition were attained from borrowing under the Wells Fargo unsecured line of credit.

     On August 16, 2002, we acquired Governor Executive Center and Crossroads, two office properties located in San Diego County containing approximately 186,000 square feet for approximately $28 million. Governor Executive Center is a three story, 52,195 square foot, 97% leased office building located in the Governor Park submarket. Crossroads is a seven story, 133,566 square foot, 100% leased multi-tenant office building located in the Mission Valley submarket. On August 30, 2002, we acquired Carmel Valley Center I & II and Carmel View Office Plaza, two office properties located in San Diego County containing approximately 185,000 square feet for approximately $41 million. Carmel Valley Center is a three story, 77,460 square foot, 94% leased office building located in the master planned development of Camel Mountain Ranch within the Rancho Bernardo submarket. The funds for these acquisitions were attained from borrowings under the Wells Fargo unsecured line of credit.

     On October 17, 2002, the borrower of our mortgage notes receivable repaid the outstanding balance on the notes totaling approximately $13.7 million. As a result of this redemption, we recognized as income the unamortized purchase discount on these notes at the time of repayment totaling approximately $750,000. The proceeds from this repayment were used to partially fund our stock repurchases described below.

Stock Repurchase Program

     On July 24, 2002, the Board of Directors of Arden Realty authorized a common stock repurchase program which authorized Arden Realty to purchase up to $75 million of its common stock over the following 12 months. As part of this repurchase program, Arden Realty has acquired a total of 1,796,000 shares as of the date of this report at an average price of approximately $22.66 per share. The funds for these repurchases were attained from the proceeds received from the repayment of the mortgage notes receivable described above and borrowings under the Wells Fargo unsecured line of credit.

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     Following is a summary of scheduled principal payments for our total outstanding indebtedness as of December 31, 2002 (in thousands):

         
Year   Amount

 
2003
  $ 5,461  
2004
    307,062 (1)
2005
    207,678  
2006
    223,649 (2)
2007
    158,681  
2008
    230,305  
2009
    111,980  
2010
    150,565  
2011
    710  
2012
    768  
Thereafter
    5,445  
 
   
 
Total
  $ 1,402,304  
 
   
 


(1)   Includes $125 million outstanding on the Wells Fargo term loan which has a two year extension option.
 
(2)   Consists primarily of $208.6 million outstanding on the Wells Fargo unsecured line of credit.

     The following is other information related to our indebtedness as of December 31, 2002 (in thousands, except percentage and interest rate data):

     Unsecured and Secured Debt:

                         
                    Weighted Average
    Balance   Percent   Interest Rate (1)
   
 
 
Unsecured Debt
  $ 831,650       59 %     6.56 %
Secured Debt
    570,654       41 %     7.37 %
 
   
     
     
 
Total Debt
  $ 1,402,304       100 %     6.89 %
 
   
     
     
 

     Floating and Fixed Rate Debt:

                         
                    Weighted Average
    Balance   Percent   Interest Rate (1)
   
 
 
Floating Rate Debt
  $ 158,587       11 %     3.42 %
Fixed Rate Debt(2)
    1,243,717       89 %     7.33 %
 
   
     
     
 
Total Debt
  $ 1,402,304       100 %     6.89 %
 
   
     
     
 


(1)   Includes amortization of prepaid financing costs.
 
(2)   Includes $175 million of floating rate debt that has been fixed through interest rate swap agreements.

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     The following table summarizes our senior unsecured notes covenant compliance ratios as of December 31, 2002 (in thousands, except percentage and covenant ratio data):

           
Net investment in real estate
  $ 2,741,624  
Cash and cash equivalents
    4,063  
Restricted Cash
    20,498  
Accumulated depreciation and amortization(1)
    392,611  
 
   
 
 
Total Assets
  $ 3,158,796  
 
   
 
Total unencumbered assets
  $ 1,839,187  
 
   
 
Mortgage loans payable
  $ 570,654  
Unsecured lines of credit
    208,587  
Unsecured term loan
    125,000  
Unsecured senior notes, net of discount
    498,063  
 
   
 
 
Total Outstanding Debt
  $ 1,402,304  
 
   
 
Consolidated EBITDA(2)
  $ 275,739  
 
   
 
Interest incurred(2)
  $ 94,162  
Loan fee amortization(2)
    3,807  
 
   
 
Debt Service(2)
  $ 97,969  
 
   
 
                 
Covenant Ratios   Test   Actual

 
 
Total Outstanding Debt/Total Assets
  Less than 60%     44 %
Secured Debt/Total Assets
  Less than 40%     18 %
EBITDA to Debt Service
  Greater than 1.5     2.8  
Unencumbered Assets/Unsecured Debt
  Greater than 150%     221 %


(1)   Includes accumulated depreciation related to a property currently held for disposition.
 
(2)   Represent amounts for the most recent four consecutive quarters. See EBITDA discussion on our Selected Financial Data section included elsewhere in this report.

     Total interest incurred and the amount capitalized was as follows (unaudited and in thousands):

                         
    Year Ended December 31,
   
    2002   2001   2000
   
 
 
Total interest incurred
  $ 94,162     $ 93,290     $ 91,052  
Amount capitalized
    (5,646 )     (9,095 )     (12,646 )
 
   
     
     
 
Amount expensed
  $ 88,516     $ 84,195     $ 78,406  
 
   
     
     
 

     As of December 31, 2002, we had approximately $24.6 million in cash and cash equivalents, including $20.5 million in restricted cash. Restricted cash includes $13.7 million in interest-bearing cash deposits required by some of our mortgage loans payable and $6.8 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.

     We may sell assets over the next twelve to twenty-four months. Due to market conditions beyond our control, it is difficult to predict the actual period and amount of these asset sales. Also depending on market conditions, at the time any such sales proceeds are realized, we expect to redeploy such amounts into investments that we believe will generate higher long-term value, which may include development or redevelopment of office buildings, acquisitions of existing buildings or repurchase of our common stock. In addition, we expect to use a portion of any proceeds to pay down portions of our debt in order to maintain our conservative leverage and coverage ratios.

     We expect to continue meeting our short-term liquidity and capital requirements generally through net cash

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provided by operating activities, proceeds from our lines of credit or from asset sales. We believe that the net cash provided by operating activities will continue to be sufficient to pay any distributions necessary to enable Arden Realty to continue qualifying as a REIT. We also believe the foregoing sources of liquidity will be sufficient to fund our short-terms liquidity needs over the next twelve months, including recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.

     We expect to meet our long-term liquidity and capital requirements such as scheduled principal repayments, development costs, property acquisitions, if any, and other non-recurring capital expenditures through net cash provided by operations, refinancing of existing indebtedness, proceeds from asset sales and/or the issuance of long-term debt and equity securities.

     Recurring non-revenue enhancing capital expenditures represent building improvements and leasing costs required to maintain current revenue. Recurring capital expenditures do not include immediate building improvements that were taken into consideration when underwriting the purchase of a building or which are being incurred to bring a building up to our operating standards or reach stabilization. We consider a property to be stabilized in the quarter when the property is at least 95% leased. Recurring capital expenditures consist primarily of replacement components such as new elevators, roof replacements and upgrade requirements required by new safety codes such as new fire-life-emergency systems.

     Non-recurring capital expenditures represent improvement costs incurred to improve a property to our operating standards or reach stabilization. These costs are normally taken into consideration during the underwriting process for a given property’s acquisition. Non-recurring capital expenditures include improvements such as new building expansion and some renovation costs.

     We capitalize both recurring capital expenditures and non-recurring capital expenditures due to the probable benefit derived in future years from both non-recurring as well as recurring capital expenditures.

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Funds From Operations and Funds Available for Distribution

     The following table reflects the calculation of our funds from operations and funds available for distribution for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 (in thousands, except percentages):

                                             
        Year Ended December 31,
       
        2002   2001   2000   1999   1998
       
 
 
 
 
Funds from Operations (1):
                                       
   
Income from continuing operations
  $ 76,208     $ 104,751     $ 103,966     $ 99,835     $ 93,059  
   
FFO from discontinued operations
    2,670       2,550       2,563       3,627       3,758  
   
Depreciation and amortization
    110,202       100,775       85,947       69,215       51,420  
   
Gain on disposition of property
    (1,967 )     (4,591 )     (2,132 )            
   
Distributions on Preferred Operating Partnership Units
    (4,312 )     (4,312 )     (4,312 )     (1,354 )      
 
   
     
     
     
     
 
Funds from Operations (2)
    182,801       199,173       186,032       171,323       148,237  
   
Arden Realty’s percentage share (3)
    97.3 %     96.8 %     96.7 %     96.2 %     95.3 %
 
   
     
     
     
     
 
 
Arden Realty’s share of Funds from Operations
  $ 177,865     $ 192,799     $ 179,893     $ 164,813     $ 141,270  
 
   
     
     
     
     
 
Funds Available for Distribution (4):
                                       
   
Funds From Operations
  $ 182,801     $ 199,173     $ 186,032     $ 171,323     $ 148,237  
   
Non-cash compensation expense
    1,199       1,938                    
   
Amortization of prepaid financing costs
    3,807       3,568                    
   
Straight-line rent
    (5,465 )     (9,208 )     (8,078 )     (7,680 )     (8,193 )
   
Recurring capital expenditures
    (3,747 )     (2,184 )     (7,437 )     (2,608 )     (1,481 )
   
Second generation tenant improvements and leasing commissions
    (24,711 )     (19,276 )     (23,057 )     (24,664 )     (20,006 )
 
   
                                 
Funds Available for Distribution
  $ 153,884     $ 174,011     $ 147,460     $ 136,371     $ 118,557  
 
   
     
     
     
     
 
   
Weighted average common operating partnership units outstanding- Diluted
    66,098       66,132       65,759       65,566       61,999  
 
   
     
     
     
     
 


(1)   We believe that funds from operations, or FFO, is a useful supplemental measure of our operating performance. We compute FFO in accordance with standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NARIET, in April 2002. The White Paper defines FFO as net income or loss computed in accordance with generally accepted accounting principles, or GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
 
    We believe that FFO, by excluding depreciation costs, the gains or losses from the sale of operating real estate properties and the extraordinary items as defined by GAAP, provides an additional perspective on our operating results. However, because these excluded items have a real economic effect, FFO is a limited measure of performance.
 
    FFO captures trends in occupancy rates, rental rates and operating costs. FFO excludes depreciation and amortization costs and it does not capture the changes in value in our properties that result from use or changes in market conditions or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Therefore, its ability to measure performance is limited.
 
    Because FFO excludes significant economic components of net income determined in accordance with GAAP, FFO should be used as an adjunct to net income and not as an alternative to net income. FFO should also not be used as an indicator of our financial performance, or as a substitute for cash flow from operating activities determined in accordance with GAAP or as a measure of our liquidity. FFO is not by itself indicative of funds available to fund our cash needs, including our ability to pay dividends or service our debt. Therefore, FFO only provides investors with an additional performance measure that when combined with measures computed in accordance with GAAP such as net income, cash flow from operating activities, investing activities and financing activities provides investors with an indication of our ability to service debt and to fund acquisitions and other expenditures.
 
    FFO is used by investors to compare our performance with other real estate companies. Other real estate companies may use different methods for calculating FFO and, accordingly, our FFO may not be comparable to other real estate companies.
 
(2)   Includes approximately $1.2 million, $1.9 million and $586,000 in non-cash compensation expense for the years ended December 31, 2002, 2001 and 2000, respectively.
 
(3)   Represents Arden Realty’s weighted average ownership percentage during the respective twelve month period.
 
(4)   Consists of FFO excluding non-cash compensation expense, amortization of prepaid financing costs, straight-line rents and less costs incurred for recurring capital expenditures, second generation tenant improvements and leasing commissions. Beginning in 2001, we revised our funds available for distribution presentation to adjust the calculation for non-cash items in FFO, including non-cash compensation expense and the amortization of

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    prepaid financing costs. In addition, we adjusted our deduction for capital expenditures and second generation tenant improvements and leasing commissions for amounts spent during the period. Prior to 2001, our adjustment for capital expenditures, tenant improvements and leasing commissions was a reserve for first and second generation space based on expected leasing volume, transaction costs and capital expenditures.

Current Economic Climate

     Our short and long-term liquidity, ability to refinance existing indebtedness, ability to issue long-term debt and equity securities at favorable rates and Arden Realty’s dividend policy are significantly impacted by the operating results of our properties, all of which are located in Southern California. Our ability to lease available space is largely dependent on the demand for office space in the markets where our properties are located. We believe current uncertainty over the national and Southern California economic environment is exerting downward pressures on the demand for Southern California commercial office space. We are expecting continued downward pressures for office demand due to several factors as follows:

    Job growth in Southern California was negative in 2002 and is largely dependent on improved economic activity.
 
    Occupancy and rental rates have decreased in recent months, are expected to decrease further due to the state of the national and local economy and competition from other office landlords;
 
    Larger tenants are taking more time to make their leasing decisions reflecting the uncertainty in the economy;
 
    Some tenants are under-utilizing their existing space and can therefore expand internally before they need new space;
 
    Sublease space, although stabilizing, stands at about 2.5% of total inventory throughout Southern California; and
 
    Over-building has increased vacancy rates in some submarkets.

     These factors have contributed to a decrease in the occupancy of our portfolio from 92.2% as of December 31, 2001 to 90.1% as of December 31, 2002.

     Overall market rental rates in Southern California declined 3 to 4% during 2002. Given the current trends, including the expected continued occupancy pressures and more aggressive pricing for sublease space, we expect market rates will decline by up to an additional 5% in 2003. Concessions also rose during 2002. As occupancy pressures continue, we expect concessions in either free rent or higher tenant improvement allowances to rise.

     The timing and extent of future changes in the national and local economy and their effects on our properties and results of operations are difficult to accurately predict. It is possible, however, that these national and regional issues may more directly affect us and our operating results in the future, making it more difficult for us to lease and renew available space, to increase or maintain rental rates as leases expire and to collect amounts due from our tenants. For additional information, see “Risk Factors – Further declines in the economic activity of Southern California will adversely affect our operating results,” “– The financial condition and solvency of our tenants may reduce our cash flow,” and “- Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.”

Forward-Looking Statements

     This Form 10-K, including the documents incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act pertaining to, among other things, our future results of operations, cash available for distribution, acquisitions, lease renewals, property development, property renovation, capital requirements and general business, industry and economic conditions applicable to us. Also, documents we subsequently file with the SEC and incorporated herein by reference will contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking

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statements as a result of the risk factors set forth below and the matters set forth or incorporated in this Form 10-K generally. We caution you, however, that this list of factors may not be exhaustive, particularly with respect to future filings.

ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk

     Market risk is the exposure or loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

     Interest Rate Risk

     In order to modify and manage the interest characteristics of our outstanding debt and limit the effects of interest rates on our operations, we may use a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts. We do not enter into any transactions for speculative or trading purposes. During 2002, we entered into interest rate swap agreements, fixing the interest rates on variable rate debt with notional amounts totaling $175.0 million.

     Some of our future earnings, cash flows and fair values relating to financial instruments are dependent upon prevailing market rates of interest, such as LIBOR. Based on interest rates and outstanding balances as of December 31, 2002, a 1% increase in interest rates on our $158.6 million of floating rate debt would decrease annual future earnings and cash flows by approximately $1.6 million and would not have an impact on the fair value of the floating rate debt. A 1% decrease in interest rates on our $158.6 million of floating rate debt would increase annual future earnings and cash flows by approximately $1.6 million and would not have an impact on the fair value of the floating rate debt. The weighted average interest rate on our floating debt as of December 31, 2002 was 3.42%.

     Our fixed rate debt, including $175.0 million in floating rate debt swapped to fixed through interest rate swaps, totaled $1,243.7 million as of December 31, 2002 with a weighted average interest rate of 7.33% and a total fair value of approximately $1,320.2 million. A 1% decrease in interest rates on our $1,243.7 million of fixed rate debt would increase its fair value by approximately $38.1 million and would not have an impact on annual future earnings and cash flows. A 1% increase in interest rates on our $1,243.7 million of fixed rate debt would decrease its fair value by approximately $36.2 million and would not have an impact of annual future earnings and cash flows.

     These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in that environment. Further, in the event of a change of this magnitude, we would consider taking actions to further mitigate our exposure to the change. Due to the uncertainty of the specific actions that would be taken and their possible effects, however, this sensitivity analysis assumes no changes in our capital structure.

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RISK FACTORS

     In addition to the other information contained or incorporated by reference in this Form 10-K readers should carefully consider the following risk factors.

Real Estate Investment Risks

     An inability to retain tenants or rent space upon lease expirations may adversely affect our ability to service our debt.

     Through 2007, 2,742 leases, including month-to-month leases, comprising approximately 78% of our leased net rentable square footage and approximately 74% of our annualized base rents at December 31, 2002 will expire as follows:

                         
    Number   Percentage of   Percentage of
    of Leases   Aggregate Portfolio   Aggregate Portfolio
Year   Expiring   Leased Square Feet   Annualized Base Rent

 
 
 
2003
    763       16.9 %     14.9 %
2004
    665       20.0 %     18.0 %
2005
    618       18.6 %     17.4 %
2006
    368       12.6 %     12.7 %
2007
    328       10.3 %     10.8 %

     If we are unable to promptly relet or renew leases for all or a substantial portion of this space, or if the rent upon renewal or reletting are significantly lower than expected, our cash flow and business could be adversely affected.

     Further declines in the economic activity of Southern California will adversely affect our operating results.

     All of our properties are located in Southern California. In 2002, many sectors of the California economy as well as the rest of the country experienced a slowdown or contraction in economic activity. As a result, in 2002, there was a decrease in occupancy in the majority of our sub-markets as well as a decrease in rental rates. At December 31, 2002 our portfolio was 90.1% occupied as compared to 92.2% occupied at December 31, 2001. During 2003, a total of approximately 3.0 million square feet of occupied space, representing approximately 16.9% of our total net rentable space, including month-to-month leases, will expire. Further deterioration of the local and national economy may result in further erosion of occupancy and rental rates and would most likely negatively affect our operating performance and property values.

     Competition affects occupancy levels, rents and cost of land which could adversely affect our revenues.

     Many office properties compete with our properties in attracting tenants to lease space. Some of the competing properties may be newer, better located or owned by parties better capitalized than we are. Although ownership of these competing properties is currently diversified among many different types of owners, from publicly traded companies and institutional investors to small enterprises and individual owners, and no one or group of owners currently dominate or significantly influence the market, consolidation of owners could create efficiencies and marketing advantages for the consolidated group that could adversely affect us. These competitive advantages, the number of competitors and the number of competitive commercial properties in a particular area could have a material adverse effect on the rents we can charge, our ability to lease space in our existing properties or at newly acquired or developed properties and the prices we have to pay for developable land.

     The financial condition and solvency of our tenants may reduce our cash flow.

     Tenants may experience a downturn in their business which may cause them to miss rental payments when due or to seek the protection of bankruptcy laws, which could result in rejection and termination of their leases or a delay in recovering possession of their premises. Although we have not experienced material losses from tenant bankruptcies, we cannot assure you that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will

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affirm their leases and continue to make rental payments in a timely manner.

     Because real estate investments are illiquid, we may not be able to sell properties when appropriate.

     Equity real estate investments are relatively illiquid. That illiquidity will tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code of 1986, as amended, may under specified circumstances impose a 100% prohibited transaction tax on the profits derived from our sale of properties held for fewer than four years, which could affect our ability to sell our properties.

     Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.

     Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas. All of our properties are currently located in areas served by utilities that either produce their own electricity, or that have procured long-term, fixed rate contracts with commercial electrical providers. While we have no information suggesting that any future service interruptions are expected we believe that higher utility costs may continue as price increases are allowed by the California Public Utility Commission or other regulatory agencies.

     Approximately 28% of our buildings and 21% of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs. The remainder of our leases provide that tenants will reimburse us for utility costs in excess of a base year amount.

     Although we have not experienced any material losses resulting from electric deregulation, it is possible that some of our tenants will not fulfill their lease obligations and reimburse us for their share of any significant electric rate increases and that we will not be able to retain or replace our tenants if energy problems in California continue.

     Increases in taxes and regulatory compliance costs may reduce our revenue.

     Except for our triple net leases, we may not be able to pass all real estate tax increases through to some of our tenants. Therefore, any tax increases may adversely affect our cash flow and our ability to pay or refinance our debt obligations. Our properties are also subject to various federal, California and local regulatory requirements, such as requirements of the Americans with Disabilities Act, and California and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in substantial compliance with these regulatory requirements. We cannot assure you, however, that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us and could have an adverse effect on our cash flow and the amounts available for distributions and to our business.

     We may acquire properties through partnerships or joint ventures with third parties that could result in financial dependency and management conflicts.

     We may participate with other entities in property ownership through joint ventures or partnerships in the future. Depending on the characteristics and business objectives of the joint venture or partnership, we may not have voting control over the joint venture or partnership. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present, including:

    our partners or co-venturers might become bankrupt;
 
    our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; and
 
    our partners or co-venturers may be in a position to take action contrary to our instructions or requests contrary to our policies or objectives.

     Neither our partnership agreement nor Arden Realty’s governing documents prevent us from participating in joint ventures with our affiliates. Because a joint venture with an affiliate may not be negotiated in a traditional arm’s length

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transaction, terms of the joint venture may not be as favorable to us as we could obtain if we entered into a joint venture with an outside third party.

     We may not be able to integrate or finance our acquisitions.

     As we acquire additional properties, we will be subject to risks associated with managing new properties, including building systems not operating as expected, delay in or failure to lease vacant space and tenants failing to renew leases as they expire. In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing accounting systems and property management structure. We cannot assure you that we will be able to succeed with that integration or effectively manage additional properties or that newly acquired properties will perform as expected. Changing market conditions, including competition from other purchasers of suburban office properties, may diminish our opportunities for attractive additional acquisitions. Moreover, acquisition costs of a property may exceed original estimates, possibly making the property uneconomical.

     Our acquisitions and renovations may not perform as expected.

     Although we currently have no plans to significantly expand or renovate our properties, we may do so in the future. Expansion and renovation projects may inconvenience and displace existing tenants, require us to engage in time consuming up-front planning and engineering activities and expend capital, and require us to obtain various government and other approvals, the receipt of which cannot be assured. While our policies with respect to expansion and renovation activities are intended to limit some of the risks otherwise associated with these activities, we will nevertheless incur risks, including expenditures of funds on, and devotion of our time to, projects that may not be completed.

     Our development activities may be more expensive than anticipated and may not yield our anticipated results.

     We currently have one development property under lease-up at the Howard Hughes Center in Los Angeles, California. The estimated total costs for this property is approximately $81.5 million. In addition, we have preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center and have completed preliminary designs on a build-to-suit office building at our Long Beach Airport Business Park. We have entitlements for an additional 425,000 net rentable square feet of office space and up to 600 hotel rooms at the Howard Hughes Center. Also, as part of our Gateway Towers acquisition in August 2002, we acquired a 5-acre developable land parcel in Torrance, California that we are also marketing for a build-to-suit building. We do not intend to commence construction on any of these projects until development plans and budgets are finalized and build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with each projects’ development risk. We also intend to review, from time to time, other opportunities for developing and constructing office buildings and other commercial properties in accordance with our development and underwriting policies.

     We expect to finance our development activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales or proceeds from our lines of credit.

     Risks associated with our development activities may include:

    abandonment of development opportunities due to a lack of financing or other reasons;
 
    construction costs of a property exceeding original estimates, possibly making the property uneconomical;
 
    occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable;
 
    construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs; and
 
    development activities would also be subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations.

     We are not subject to any limit on the amount or percentage of our assets that may be invested in any single property

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or any single geographic area.

     Our governing documents do not restrict the amount or percentage of our assets that we may invest in a single property or geographic area. All of our properties are currently in Southern California and we have no immediate plans to invest outside of Southern California. This lack of diversification in our investments makes us more highly susceptible to changes affecting the Southern California economy and real estate markets or damages from regional events such as earthquakes.

     We may not be able to expand into new markets successfully.

     While our business is currently limited to the Southern California market, it is possible that we will in the future expand our business to new geographic markets. We will not initially possess the same level of familiarity with new markets outside of Southern California, which could adversely affect our ability to manage, lease, develop or acquire properties in new localities.

Financing Risks

     Our significant amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition.

     As of December 31, 2002, we had total debt of approximately $1.4 billion, consisting of approximately $570.7 million in secured debt and approximately $831.7 million of unsecured debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     Our substantial indebtedness could:

    require us to dedicate a substantial portion of our cash flow to pay our debt, thereby reducing the availability of our cash flow to fund distributions, working capital, capital expenditures, acquisition and development activity and other business purposes;
 
    make it more difficult for us to satisfy our debt obligations;
 
    limit our ability to refinance our debt and obtain additional debt financing; and
 
    increase our vulnerability to general adverse economic and real estate industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the real estate industry.

     We may be able to incur substantially more debt which would increase the risks associated with our substantial leverage.

     Despite current indebtedness levels, we may still be able to incur substantially more debt in the future. Neither our partnership agreement nor Arden Realty’s governing documents limit the amount or the percentage of indebtedness that we may incur. We may borrow up to a maximum of $320 million under our two lines of credit. As of December 31, 2002, we had the ability to borrow an additional approximately $111.4 million under these two lines of credit. If new debt is added to our current debt levels, the related risks that we now face could intensify and could increase the risk of default on our indebtedness.

     Scheduled debt payments could adversely affect our financial condition.

     Our cash flow could be insufficient to meet required payments of principal and interest when due. In addition, we may not be able to refinance existing indebtedness, which in virtually all cases requires substantial principal payments at maturity, and, if we can refinance, the terms of the refinancing might not be as favorable as the terms of our existing indebtedness. As of December 31, 2002, approximately $5.5 million of principal will be coming due over the next twelve months. If principal payments cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt and continue to service and repay our debt obligations.

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     Rises in interest rates could adversely affect our financial condition.

     An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate debt which rise and fall upon changes in interest rates. At December 31, 2002, approximately 11% of our debt was variable rate debt. Increases in interest rates would also impact the refinancing of our fixed rate debt. If interest rates are higher when our fixed debt becomes due, we may be forced to borrow at the higher rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our debt, including the exchange notes. As a protection against rising interest rates, we may enter into agreements such as interest rate swaps, caps, floors and other interest rate exchange contracts. These agreements, however, increase our risks as to the other parties to the agreements not performing or that the agreements could be unenforceable. During the fourth quarter of 2002 we entered into interest rate lock agreements totaling $175 million that fixed the floating interest rates on $50 million of our unsecured line of credit and all of our $125 million unsecured term loan.

     Many of our properties are subject to mortgage financing which could result in foreclosure if we are unable to pay or refinance the mortgages when due.

     We currently have outstanding five mortgage financings totaling $552.3 million that are secured by 67 of our properties. The properties in each of these financings are fully cross-collateralized and cross-defaulted. To the extent two or more mortgages are cross-defaulted, a default in one mortgage will trigger a default in the other mortgages. The cross-defaults can give the lender a number of remedies depending on the circumstances such as the right to increase the interest rate, demand additional collateral, accelerate the maturity date of the mortgages or foreclose on and sell the properties. To the extent two or more mortgages are cross-collateralized, a default in one mortgage will allow the mortgage lender to foreclose upon and sell the properties that are not the primary collateral for the loan in default. Four additional properties are subject to single property mortgages totaling approximately $18.4 million at December 31, 2002. If we are unable to meet our obligations under these mortgages, we could be forced to pay higher interest rates or provide additional collateral or the properties subject to the mortgages could be foreclosed upon and sold, which could have a material adverse effect on us and our ability to pay or refinance our debt obligations.

Tax Risks

     Our partnership agreement restricts our ability to accumulate cash that might be used in future periods to make debt payments or to fund future growth.

     In order to qualify as a REIT and avoid federal income tax liability, Arden Realty must distribute to its stockholders at least 90% of its net taxable income, excluding net capital gain, and to avoid income taxation, its distributions must not be less than 100% of its net taxable income, including capital gains. To avoid excise tax liability, its distributions to its stockholders for the year must exceed the sum of 85% of its ordinary income, 95% of its capital gain net income, and any undistributed taxable income from prior years. As a result of these distribution requirements, we do not expect to accumulate significant amounts of cash. Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to make payments on our debt obligations and to fund future growth.

       We intend to qualify as a partnership, but we cannot guarantee that we will qualify.

     We intend to qualify as a partnership for federal income tax purposes. However, if we are a “publicly traded partnership,” we would be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90% of our income is qualifying income as defined in the Internal Revenue Code. The income requirements applicable to REITs and the definition of “qualifying income” for purposes of this 90% test are similar in most respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. We believe that we would meet this 90% test, but we cannot guarantee that we would. If we were to be taxed as a corporation, we would incur substantial tax liabilities and Arden Realty would fail to qualify as a REIT for federal income tax purposes.

     We may suffer adverse tax consequences and be unable to attract capital if Arden Realty fails to qualify as a REIT.

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      We believe that since its taxable year ended December 31, 1996, Arden Realty has been organized and operated, and intends to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. Although we believe that Arden Realty has been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that it has been or will continue to be organized or operated in a manner so as to qualify or remain so qualified. For Arden Realty to qualify as a REIT, it must satisfy numerous requirements established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations and tests regarding various factual matters and circumstances not entirely within Arden Realty’s control. The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT, like Arden Realty, that holds its assets through an investment in a partnership. No assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of qualification. We are, however, not aware of any pending legislation that would adversely affect Arden Realty’s ability to qualify as a REIT. Arden Realty’s qualification and taxation as a REIT depends on its ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Internal Revenue Code, the results of which have not been and will not be reviewed by its tax counsel.

     If Arden Realty failed to qualify as a REIT in any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, it also would be disqualified as a REIT for the four taxable years following the year during which qualification was lost. If it were disqualified as a REIT, its ability to raise additional capital could be significantly impaired. This could reduce the funds it would have available to pay distributions to its stockholders and to service its debt.

     Even if Arden Realty qualifies for and maintains its REIT status, it will be subject to certain federal, state and local taxes on its income and property. For example, if it has net income from a prohibited transaction, specifically sales or other taxable dispositions of property held primarily for sale to customers in the ordinary course of business, that income will be subject to a 100% tax.

Other Risks

     We are subject to agreements and policies that may deter change in control offers that might be attractive to Arden Realty’s stockholders.

     Certain provisions of Arden Realty’s charter and bylaws as well as its stockholder rights plan, which is described below, may delay, defer or prevent a third party from making offers to acquire Arden Realty or control over Arden Realty. For example, such provisions may:

    deter tender offers for Arden Realty’s common stock, which offers may be attractive to the stockholders; and
 
    deter purchases of large blocks of common stock, thereby limiting the opportunity for stockholders to receive a premium for their common stock over then-prevailing market prices.

     Arden Realty’s charter contains a provision designed to prevent a concentration of ownership among its stockholders that would cause it to fail to qualify as a REIT. Under the Internal Revenue Code, not more than 50% in value of its outstanding shares of common stock may be owned, actually or constructively, by five or fewer individuals, including specific kinds of entities, at any time during the last half of its taxable year. In addition, if Arden Realty, or an owner of 10% or more of its common stock, actually or constructively owns 10% or more of a tenant of Arden Realty, or a tenant of any partnership in which Arden Realty is a partner, the rent received by Arden Realty from that tenant will not be qualifying income for purposes of the REIT gross income tests. In order to protect Arden Realty against the risk of losing REIT status, the ownership limit included in its charter limits actual or constructive ownership of its outstanding shares of common stock by any single stockholder to 9.0%, by value or by number of shares, whichever is more restrictive, of the then outstanding shares of common stock. Actual or constructive ownership of shares of common stock in excess of the ownership limit will cause the violative transfer or ownership to be void with respect to the transferee or owner as to that number of shares in excess of the ownership limit and such shares will be automatically transferred to a trust for the exclusive benefit of one or more qualified charitable organizations. That transferee or owner

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will have no right to vote such shares or be entitled to dividends or other distributions with respect to such shares.

     Although Arden Realty’s Board of Directors presently has no intention of doing so, except as described below, its Board of Directors could waive this restriction with respect to a particular stockholder if it were satisfied, based upon the advice of counsel or a ruling from the Internal Revenue Service, that ownership by such stockholder in excess of the ownership limit would not jeopardize Arden Realty’s status as a REIT and its Board of Directors otherwise decided such action would be in its best interests. Arden Realty’s Board of Directors has waived its ownership limit with respect to Mr. Ziman and certain family members and affiliates and has permitted these parties to actually and constructively own up to 13.0% of the outstanding shares of common stock.

     Arden Realty’s charter authorizes its Board of Directors to cause Arden Realty to issue authorized but unissued shares of common stock or preferred stock and to reclassify any unissued shares of common stock or classify any unissued and reclassify any previously classified but unissued shares of preferred stock and, with respect to the preferred stock, to set the preferences, rights and other terms of such classified or unclassified shares. Although its Board of Directors has no such intention at the present time, it could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of Arden Realty’s stockholders.

     Arden Realty’s Board of Directors is divided into three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of directors will be elected by the stockholders. The staggered terms of directors may reduce the possibility of a tender offer or an attempt to change control even though a tender offer or change in control might be in the best interest of Arden Realty’s stockholders.

     In August 1998, Arden Realty declared a dividend distribution of one preferred share purchase right on each outstanding share of its common stock pursuant to a stockholder plan. Subject to limited exceptions, these rights will be exercisable if a person or group acquires 15% or more of its common stock or announces a tender offer for 15% or more of its common stock. Under certain circumstances, each right will entitle stockholders to buy one one-hundredth of a share of Arden Realty’s newly created Class A Junior Participating Preferred Stock at an exercise price of $75. Arden Realty’s Board of Directors will be entitled to redeem the rights at $.01 per right at any time before a person has acquired 15% or more of the outstanding common stock. The rights plan will expire in August 2008.

     Each right entitles its holder to purchase, at the right’s then-current exercise price, a number of Arden Realty’s common shares having a market value at that time of twice the right’s exercise price. Rights held by the person or group seeking to acquire 15% or more of Arden Realty’s common stock will become void and will not be exercisable to purchase shares at the bargain purchase price. If Arden Realty is acquired in a merger or other business combination transaction which has not been approved by its Board of Directors, each right will entitle its holder to purchase, at the right’s then-current exercise price, a number of the acquiring company’s common shares having a market value at that time of twice the right’s exercise price.

     Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow.

     We carry comprehensive liability, fire, extended coverage, terrorism and rental loss insurance policies which currently cover all of our properties with specifications and insured limits that we believe are adequate and appropriate under the circumstances. Some losses, however, are generally not insured against because it is not economically feasible to do so. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the property, as well as the anticipated future revenue from the property and, in the case of debt which is recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the property. Any loss would adversely affect our cash flow with respect to the property subject to the loss. Moreover, we would generally be liable for any unsatisfied obligations other than non-recourse obligations with respect to the property subject to the loss.

     Lack of availability of insurance coverage for biological, chemical or nuclear terrorist attacks could adversely affect our financial condition.

     Our current terrorism insurance policy, that expires in April 2003, specifically excludes biological, chemical or nuclear terrorist acts. We have been notified by our insurance broker that in the aftermath of September 11 th attacks, insurance carriers will continue to exclude these types of attacks from terrorism insurance policies or offer coverage for

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biological, chemical or nuclear attacks coverages at prohibitive costs. Although we did not derive more than 4.3% of our 2002 net operating income from any one of the properties in our portfolio, a biological, chemical or nuclear terrorist attack damaging several of our properties or negatively impacting the financial condition of our tenants could materially deteriorate our operating results and overall financial condition.

     An earthquake could adversely affect our business.

     All of our properties are located in Southern California which is a high risk geographical area for earthquakes. Depending upon its magnitude, an earthquake could severely damage our properties which would adversely affect our business. We maintain earthquake insurance for our properties and the resulting business interruption. We cannot assure you that our insurance will be sufficient if there is a major earthquake.

     Our properties may be subject to environmental liabilities.

     Under federal, state and local environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under these laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. These costs may be substantial, and the presence of these substances, or the failure to remediate the contamination on the property, may adversely affect the owner’s ability to sell or rent the property or to borrow against the property. Persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility also may be liable for the costs of removal or remediation of a release of hazardous or toxic substances at the disposal or treatment facility, whether or not the facility is owned or operated by that person. Some laws create a lien on the contaminated site in favor of the government for damages and costs incurred in connection with the contamination. Finally, third parties may have claims against the owner of the site based on damages and costs resulting from environmental contamination emanating from that site.

     Specific federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for release of asbestos-containing material and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with the ownership and operation of our properties, we may be potentially liable for those costs.

     In the past few years, independent environmental consultants have conducted or updated Phase I environmental assessments and other environmental investigations as appropriate at some of our properties. The environmental site assessments and investigations have identified a total of 32 properties in our portfolio, representing approximately 32.5% of the total rentable square feet in the portfolio, affected by environmental concerns. These environmental concerns include properties that may be impacted by known or suspected (a) contamination caused by third party sources or (b) soil and/or groundwater contamination which has been remediated, and (c) those containing underground storage tanks or asbestos.

     Of these properties, two (2) are believed to be affected by contamination caused by third party sources and also houses an underground storage tank, four (4) contain friable asbestos, thirteen (13) contain non-friable asbestos, and thirteen (13) house underground storage tanks only. The properties affected by contamination are primarily affected by petroleum and solvent substances, and in each case a third party has indemnified us for any and all problems associated with this contamination. With regard to those properties affected by asbestos, asbestos does not pose a health hazard if it is not disturbed in such a way to cause an airborne release of asbestos. Asbestos is friable when it can be crumbled, pulverized or reduced to powder by hand pressure, and non-friable when hand pressure cannot release encapsulated asbestos fibers. Friable asbestos is more likely to be released into the air than no-friable asbestos. We manage all asbestos in ways that minimize its potential to become airborne or otherwise threaten human health. Regarding underground storage tanks, subsurface leakage of the materials contained within the tank constitutes the primary risk posed by these devices. We comply with all applicable laws, including double-wall construction, testing protocols, placement of tanks within bermed areas, and the installation of leak and spill detection equipment, to minimize the risks

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posed by underground storage tanks.

     The environmental site assessments and investigations have not, however, revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations taken as a whole, nor are we aware of any material environmental liability. Nevertheless, it is possible that our environmental site assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware.

     We believe that our properties are in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances or petroleum products, except as noted above. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our present properties, other than as noted above. It is possible that future laws will impose material environmental liabilities on us and that the current environmental condition of our properties will be affected by tenants, by the condition of land or operations in the vicinity of our properties, such as the presence of underground storage tanks, or by third parties unrelated to us.

ITEM 8. Financial Statements and Supplementary Data

     The financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K commencing on page F-1.

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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

PART III

     The information required by Part III is incorporated by reference from Arden Realty’s definitive proxy statement for its 2003 Annual Meeting of Stockholders.

ITEM 10. Directors and Executive Officers of the Registrant

     The information contained in the sections captioned “Proposal I; Election of Directors” and “Section 16(a) Beneficial ownership Reporting Compliance” of the definitive proxy statement is incorporated herein by reference.

ITEM 11. Executive Compensation

     The information contained in the section captioned “Executive Compensation” of the definitive proxy statement is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Equity Compensation Plan Information

     The following table provides information as of December 31, 2002 with respect to shares of Arden Realty’s common stock that may be issued under its existing equity compensation plans (in thousands, except per share amounts):

                           
                      Number of shares of common
                      stock remaining available for
      Number of shares of common stock to   Weighted-average exercise   future issuance under equity
      be issued upon exercise of outstanding   price of outstanding options,   compensation plans (excluding
Plan Category   options, warrants and rights   warrants and rights   shares reflected in column (a)) (1)

 
 
 
      (a)   (b)   (c)
Equity Compensation plans approved by shareholders
    4,189     $ 24.33       1,115  
Equity Compensation plans not approved by shareholders
                 
 
   
     
     
 
 
Total
    4,189     $ 24.33       1,115  
 
   
     
     
 


(1)   Includes shares available for issuance under restricted stock grants.

     The other information contained in the section captioned “Security Ownership of Principal Stockholders and Management” of the definitive proxy statement is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions

     The information contained in the section captioned “Certain Relationships and Related Transactions” of the definitive proxy statement is incorporated herein by reference.

ITEM 14. Controls and Procedures

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports 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 Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our

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management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have an investment in an unconsolidated entity. Because we do not control or manage this entity, our disclosure controls and procedures with respect to such an entity is necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

     Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

     There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

PART IV

ITEM 15. Exhibits, Financial Statements, and Reports on Form 8-K

(a) Financial Statements

     The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K:

     
    Page
   
Report of Independent Auditors   F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001   F-2
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000   F-3
Consolidated Statements of Partners’ Capital for the years ended December 31, 2002, 2001 and 2000   F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000   F-5
Notes to Financial Statements   F-6

     All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.

(b)  Reports on Form 8-K

     None.

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(c) Exhibits

             
Exhibit            
Number   Description        

 
       
3.1*   Second Amended and Restated Agreement of Limited Partnership of Arden Realty Limited Partnership, dated September 7, 1999, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on November 15, 1999.
     
3.2*   Admission of New Partners and Amendment to Limited Partnership Agreement entered into as of the 20th day of December, 2000, by and between Arden Realty Limited Partnership and the persons identified as the “New Partners” therein.
     
4.1*   Indenture between Arden Realty Limited Partnership and The Bank of New York, as trustee, dated March 14, 2000 as filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-35406).
 
4.2*   Form of Arden Realty Limited Partnership’s unsecured 8.875% senior note due 2005, dated March 17, 2000 filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-35406).
 
4.3*   Form of Arden Realty Limited Partnership’s unsecured 9.150% senior note due 2010, dated March 17, 2000 filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-35406).
 
4.4*   Form of Arden Realty Limited Partnership’s unsecured 8.50% senior note due 2010, dated November 20, 2000 as filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-53376).
 
4.5*   Form of Arden Realty Limited Partnership’s 7.00% Note due 2007, dated November 9, 2002 as filed as an exhibit to Arden Realty Limited Partnership’s current report on Form 8-K filed with the Commission on November 9, 2001.
 
4.6*   Officers’ certificate dated March 17, 2000 with respect to the terms of Arden Realty Limited Partnership’s 8.875% senior note due 2005 and 9.150% Senior Notes due 2010 as filed as an exhibit to Arden Realty, Inc. 10-K filed with the Commission on April 1, 2002.
 
4.7*   Officers’ certificate dated November 20, 2000 with respect to the terms of Arden Realty Limited Partnership’s 8.50% Senior Notes due 2010 as filed as an exhibit to Arden Realty, Inc. 10-K filed with the Commission on April 1, 2002.
 
4.8*   Officer’s certificate dated November 9, 2001 with respect to the terms of Arden Realty Limited Partnership’s 7.00% Note due 2007, filed as an exhibit to Arden Realty Limited Partnership’s current report on Form 8-K filed with the Commission on November 9, 2001.
     
10.1*^   1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty’s registration statement on Form S-11 (No. 333-8163).
     
10.2*^   Amendment Number 1 to the 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty’s Schedule 14A filed with the Commission on June 23, 1998.
     
10.3*   Form of Officers and Directors Indemnification Agreement as filed as an exhibit to Arden Realty’s registration statement on Form S-11 (No. 333-8163).
     
10.4*   Loan Agreement dated June 8, 1998 by and between Arden Realty Finance III, L.L.C., a Delaware limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation filed as an exhibit to Arden Realty’s quarterly report of Form 10-Q filed with the Commission on August 14, 1998.
     
10.5*   Mortgage Note, dated June 8, 1998 for $136,100,000 by and between Arden Realty Finance III, L.L.C., a Delaware limited liability company, and Lehman Brothers Realty Corporation, a Delaware corporation. (Exhibit B. to Exhibit 10.4 above).
     
10.6*   Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.4 above).
     
10.7*   Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to Exhibit 10.4 above).
     
10.8*   Deed of Trust, Assignment of Rents and Leases, Security Agreement, and Fixture Filing dated as of June 8, 1998 made by Arden Realty Finance III, L.L.C. as Grantor, to Commonwealth Land Title Company as Trustee for the benefit of Lehman Brothers Realty Corporation as Beneficiary, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.9*   Assignment of Leases and Rents dated June 8, 1998, by and between Arden Realty Finance III, L.L.C., a Delaware limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation, its successors and assigns filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.

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Exhibit            
Number   Description        

 
       
10.10*   Collateral Assignment of Management Agreement and Subordination Agreement dated as of June 8, 1998 among Arden Realty Finance III, L.L.C., a Delaware limited liability company (“Borrower”), Lehman Brothers Realty Corporation, a Delaware corporation, (“Lender”), and Arden Realty Limited Partnership, a Maryland limited partnership (“Manager”), filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.11*   Security Agreement is entered into as of June 8, 1998 by and between Arden Realty Finance III, L.L.C., a Delaware limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.12*   Environmental Indemnity Agreement dated June 8, 1998 by Arden Realty Finance III, L.L.C., a Delaware limited liability company, in favor of Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.13*   Letter agreement between Lehman Brothers Realty Corporation, Arden Realty Finance III, L.L.C., Arden Realty and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.14*   Loan Agreement by and between Arden Realty Finance IV, LLC, a Delaware limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.15*   Mortgage Note, dated June 8, 1998 for $100,600,000 by and between Arden Realty Finance IV, L.L.C., a Delaware limited liability company (“Maker”), and Lehman Brothers Realty Corporation, a Delaware corporation (Exhibit B to Exhibit 10.14 above).
     
10.16*   Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.14 above).
     
10.17*   Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to Exhibit 10.14 above).
     
10.18*   Deed of Trust, Assignment of Rents and Leases, Security Agreement, and Fixture Filing dated as of June 8, 1998 made by Arden Realty Finance IV, L.L.C. as Grantor, to Commonwealth Land Title Company as Trustee for the benefit of Lehman Brothers Realty Corporation as Beneficiary, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.19*   Assignment of Leases and Rents dated June 8, 1998, by and between Arden Realty Finance IV, L.L.C., a Delaware limited liability company (“Assignor”), and Lehman Brothers Realty Corporation, a Delaware corporation, its successors and assigns (“Assignee”), filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.20*   Collateral Assignment of Management Agreement and Subordination Agreement dated as of June 8, 1998 among Arden Realty Finance IV, L.L.C., a Delaware limited liability company (“Borrower”), Lehman Brothers Realty Corporation, a Delaware corporation, (“Lender”), and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.

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Exhibit            
Number   Description        

 
       
10.21*   Security Agreement is entered into as of June 8, 1998 by and between Arden Realty Finance IV, L.L.C., a Delaware limited liability company (“Debtor”), and Lehman Brothers Realty Corporation, a Delaware corporation (“Secured Party”), filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.22*   Environmental Indemnity Agreement dated June 8, 1998 by Arden Realty Finance IV, L.L.C., a Delaware limited liability company (“Indemnitor”), in favor of Lehman Brothers Realty Corporation, a Delaware corporation (“Lender”), filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.23*   Letter agreement between Lehman Brothers Realty Corporation, Arden Realty Finance IV, L.L.C., Arden Realty and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
     
10.24*^   Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Richard S. Ziman, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q/A filed with the Commission on December 15, 1998.
     
10.25*^   Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Victor J. Coleman, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q/A filed with the Commission on December 15, 1998.
     
10.26*^   Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Herbert Porter, filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q/ A filed with the Commission on December 15, 1998.
     
10.27*^   Amended and Restated Employment Agreement dated January 1, 1999, between Arden Realty and Mr. Robert Peddicord, filed as a exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on August 8, 2000.
     
10.28*   Miscellaneous Rights Agreement among Arden Realty, Arden Realty Limited Partnership, NAMIZ, Inc. and Mr. Ziman, filed as an exhibit to Arden Realty’s registration statement on Form S- II (No. 333-8163).
     
10.29*   Credit Facility documentation consisting of Second Amended and Restated Revolving Credit Agreement by and among Arden Realty Limited Partnership and a group of banks led by Wells Fargo Bank as filed as an exhibit to Arden Realty’s quarterly report on Form 10-Q filed with the Commission on May 12, 2000.
     
10.30*   Mortgage Financing documentation consisting of Loan Agreement by and between Arden Realty’s special purpose financing subsidiary and Lehman Brothers Realty Corporation (the Loan Agreement includes the Mortgage Note, Deed of Trust, and form of Tenant Estoppel Certificate and Agreement as exhibits) as filed as an exhibit to Arden Realty’s registration statement of Form S-11 (No. 333-30059).
     
10.31*   Promissory Note, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty’s current report Form 8-K filed with the Commission on April 20, 1999.

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Exhibit            
Number   Description        

 
       
10.32*   Deed of Trust and Security Agreement, dated as of March 30, 1999, with Arden Realty Finance V, L.L.C. as the Trustor and Massachusetts Mutual Life Insurance Company as the Beneficiary filed as an exhibit to Arden Realty’s current report on Form 8-K filed with the Commission on April 20, 1999.
     
10.33*   Assignment of Leases and Rents, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty’s current report on Form 8-K filed with the Commission on April 20, 1999.
     
10.34*   Subordination of Management Agreement, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V. L.L.C. filed as an exhibit to Arden Realty’s current report on Form 8-K filed with the Commission on April 20, 1999.
     
10.35*   Environmental Indemnification and Hold Harmless Agreement, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty’s current report on Form 8-K filed with the Commission on April 20, 1999.
     
10.42*^   Amended and Restated Employment Agreement dated May 27, 1999, between Arden Realty and Mr. Randy J. Noblitt as filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-53376).

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Exhibit            
Number   Description        

 
       
10.43*^   Amended and Restated Employment Agreement dated July 27, 2000, by and between Arden Realty and Mr. Richard S. Ziman as filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-53376).
     
10.44*^   Amended and Restated Employment Agreement dated July 27, 2000, by and between Arden Realty and Mr. Victor J. Coleman as filed as an exhibit to Arden Realty Limited Partnership’s registration statement on Form S-4 (No. 333-53376).
     
10.45*   Amendment to the 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty’s Schedule 14A filed with the Commission on April 25, 2000.
     
10.46*^   Amended and Restated Employment Agreement dated June 2, 1999, between Arden Realty and Mr. Richard S. Davis as filed as an exhibit to Arden Realty Limited Partnership’s annual report on Form 10-K filed with the Commission on April 1, 2002.
     
10.47*^   Second Amended and Restated 1996 Stock Option and Incentive Plan of Arden Realty Limited Partnership and Arden Realty Limited Partnership dated September 20th, 2001 as filed as an exhibit to Arden Realty, Inc.’s quarterly report on Form 10-Q filed with the Commission on November 14, 2001.
     
10.48*^   Form of Promissory Note entered into on July 19, 2001 and September 28, 2001 between Arden Realty Limited Partnership and Richard Ziman, Victor Coleman, Andrew Sobel and Robert Peddicord, respectively, as filed as an exhibit to Arden Realty Limited Partnership’s quarterly report on Form 10-Q filed with the Commission on November 14, 2001.
     
10.49*^   Amended and Restated Employment Agreement dated March 29, 2002, between Mr. Andrew Sobel and Arden Realty, Inc. as filed as an exhibit to Arden Realty, Inc.’s quarterly report on Form 10-Q filed with the Commission on August 14, 2002.
     
10.50*^   Form of Promissory Note entered into on February 18, 2002 between Arden Realty, Inc. and Mr. Andrew Sobel as filed as an exhibit to Arden Realty, Inc.’s quarterly report on Form 10-Q filed with the Commission on August 14, 2002.
     
10.51*   Term Loan Agreement between Arden Realty Limited Partnership and Wells Fargo Bank, National Association dated as of June 12, 2002 as filed as an exhibit to Arden Realty Limited Partnership’s quarterly report on Form 10-Q filed with the Commission on August 14, 2002.
     
10.52*   Third Amended and Restated Revolving Credit Agreement between Arden Realty Limited Partnership and a group of lenders led by Wells Fargo Bank dated as of August 9, 2002 as filed as an exhibit to Arden Realty Limited Partnership’s quarterly report on Form 10-Q filed with the Commission on November 12, 2002.
     
10.53*   Amendment to Term Loan Agreement between Arden Realty Limited Partnership and Wells Fargo Bank, National Association dated as of September 19, 2002 as filed as an exhibit to Arden Realty Limited Partnership’s quarterly report on Form 10-Q filed with the Commission on August 14, 2002.
     
10.54   Amended and Restated Employment Agreement dated May 27, 1999, by and between Arden Realty Limited Partnership and Mr. David Swartz.
     
12.1   Statement regarding computation of ratios.
     
21.1   Subsidiaries of Arden Realty Limited Partnership.

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Exhibit            
Number   Description        

 
       
23.1   Consent of independent auditors.
     
99.1   Officers’ certifications pursuant to Section 906 off the Sarbanes-Oxley Act of 2002 and Additional Written Statements.


(*) Incorporated by reference.
 
(^) Management contract or compensatory plan or arrangement required to be identified by Item 15(a)3.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 25, 2003.

         
    ARDEN REALTY LIMITED PARTNERSHIP
         
    By:
Its:
  ARDEN REALTY, INC.
General Partner
         
    By:   /s/ RICHARD S. ZIMAN

Richard S. Ziman
Chairman of the Board
and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

         
Name   Title   Date

 
 
/s/ RICHARD S. ZIMAN
Richard S. Ziman               
  Chairman of the Board, Chief
Executive Officer and Director
  March 25, 2003
         
/s/ VICTOR J. COLEMAN
Victor J. Coleman               
  President, Chief Operating
Officer and Director
  March 25, 2003
         
/s/ ANDREW J. SOBEL
Andrew J. Sobel               
  Executive Vice President
Strategic Planning and Operations
  March 25, 2003
         
/s/ RICHARD S. DAVIS
Richard S. Davis               
  Senior Vice President, and
Chief Financial Officer
  March 25, 2003
         
/s/ LARRY S. FLAX
Larry S. Flax               
  Director   March 20, 2003
         
/s/ CARL D. COVITZ
Carl D. Covitz               
  Director   March 20, 2003
         
/s/ PETER S. GOLD
Peter S. Gold               
  Director   March 19, 2003
         
/s/ STEVEN C. GOOD
Steven C. Good               
  Director   March 20, 2003

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OFFICERS’ CERTIFICATIONS

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard S. Ziman, certify that:

1.   I have reviewed this annual report on Form 10-K of Arden Realty Limited Partnership;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)       any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

   
  /s/ Richard S. Ziman
Richard S. Ziman
Chairman of the Board and Chief Executive Officer
Arden Realty, Inc.

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CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Richard S. Davis, certify that:

1.   I have reviewed this annual report on Form 10-K of Arden Realty Limited Partnership;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)       any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

   
  /s/ Richard S. Davis
Richard S. Davis
Senior Vice President and Chief Financial Officer
Arden Realty, Inc.

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CERTIFICATION OF CHIEF OPERATING OFFICER

I, Victor J. Coleman, certify that:

1.   I have reviewed this annual report on Form 10-K of Arden Realty Limited Partnership;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

   
  /s/ Victor J. Coleman
Victor J. Coleman
President and Chief Operating Officer
Arden Realty, Inc.

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CERTIFICATION OF EXECUTIVE VICE PRESIDENT

I, Andrew J. Sobel, certify that:

1.   I have reviewed this annual report on Form 10-K of Arden Realty Limited Partnership;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)       any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

   
  /s/ Andrew J. Sobel
Andrew J. Sobel
Executive Vice President – Strategic Planning and Operations
Arden Realty, Inc.

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CERTIFICATION OF SENIOR VICE PRESIDENT

I, Robert C. Peddicord, certify that:

1.   I have reviewed this annual report on Form 10-K of Arden Realty Limited Partnership;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

   
  /s/ Robert C. Peddicord
Robert C. Peddicord
Senior Vice President – Leasing and Property Operations
Arden Realty, Inc.

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CERTIFICATION OF GENERAL COUNSEL

I, David A. Swartz, certify that:

1.   I have reviewed this annual report on Form 10-K of Arden Realty Limited Partnership;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

   
  /s/ David A. Swartz
David A. Swartz
General Counsel and Secretary
Arden Realty, Inc.

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REPORT OF INDEPENDENT AUDITORS

The Partners
Arden Realty Limited Partnership

     We have audited the accompanying consolidated balance sheets of Arden Realty Limited Partnership as of December 31, 2002 and 2001 and the related consolidated statements of income, partners’ capital, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the management of Arden Realty Limited Partnership. 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. 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 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 Arden Realty Limited Partnership at December 31, 2002 and 2001 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

     As discussed in Note 3 to the financial statements, on January 1, 2002, Arden Realty Limited Partnership adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

     
Los Angeles, California
January 28, 2003
  /s/ ERNST & YOUNG LLP

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ARDEN REALTY LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
                     
        December 31,
       
        2002   2001
       
 
Assets
               
Commercial properties:
               
 
Land
  $ 484,439     $ 460,322  
 
Buildings and improvements
    2,197,896       2,016,199  
 
Tenant improvements and leasing costs
    325,779       258,815  
 
   
     
 
 
    3,008,114       2,735,336  
 
Less: accumulated depreciation
    (388,057 )     (301,795 )
 
   
     
 
 
    2,620,057       2,433,541  
 
Properties under development
    65,296       116,822  
 
Land available for development
    23,731       19,255  
 
Properties held for disposition, net
    32,540       53,362  
 
   
     
 
 
Net investment in real estate
    2,741,624       2,622,980  
Cash and cash equivalents
    4,063       37,041  
Restricted cash
    20,498       18,768  
Rent and other receivables, net of allowance of $4,001 and $3,770 at December 31, 2002 and 2001, respectively
    2,917       9,685  
Due from general partner
    3,428       2,258  
Mortgage notes receivable, net of discount
          13,495  
Deferred rent
    43,646       38,989  
Prepaid financing costs, expenses and other assets, net of accumulated amortization of $10,181 and $8,774 at December 31, 2002 and 2001, respectively
    19,661       20,485  
 
   
     
 
   
Total assets
  $ 2,835,837     $ 2,763,701  
 
   
     
 
Liabilities and Partners’ Capital
               
Mortgage loans payable
  $ 570,654     $ 573,452  
Unsecured lines of credit
    208,587       180,350  
Unsecured term loan
    125,000        
Unsecured senior notes, net of discount
    498,063       497,681  
Accounts payable and accrued expenses
    55,705       43,002  
Security deposits
    20,645       19,683  
 
   
     
 
   
Total liabilities
    1,478,654       1,314,168  
Minority interests
    2,784       2,866  
Partners’ Capital
               
Preferred partner, 2,000,000 Series B Cumulative Redeemable Preferred Units outstanding at December 31, 2002 and 2001
    50,000       50,000  
General and limited partners, 64,701,042 and 65,936,810 common OP Units outstanding at December 31, 2002 and 2001, respectively
    1,318,426       1,405,800  
Deferred compensation
    (11,259 )     (9,133 )
Accumulated other comprehensive loss
    (2,768 )      
 
   
     
 
   
Total partners’ capital
    1,354,399       1,446,667  
 
   
     
 
   
Total liabilities and partners’ capital
  $ 2,835,837     $ 2,763,701  
 
   
     
 

     See accompanying notes to financial statements.

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ARDEN REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per unit amounts)
                           
      Year Ended December 31,
     
      2002   2001   2000
     
 
 
Revenues
  $ 412,054     $ 414,485     $ 380,622  
Property operating expenses
    129,723       121,086       109,512  
 
   
     
     
 
 
    282,331       293,399       271,110  
General and administrative
    11,804       11,083       8,306  
Interest
    88,516       84,195       78,406  
Depreciation and amortization
    110,202       100,775       85,947  
Interest and other income
    (2,542 )     (2,941 )     (3,527 )
 
   
     
     
 
Income from continuing operations before gain on sale of properties and minority interest
    74,351       100,287       101,978  
Gain on sale of properties
    1,967       4,591       2,132  
 
   
     
     
 
Income from continuing operations before minority interest
    76,318       104,878       104,110  
Minority interest
    (110 )     (127 )     (144 )
 
   
     
     
 
Income from continuing operations
    76,208       104,751       103,966  
Discontinued operations
    1,455       1,506       1,243  
 
   
     
     
 
Net income
  $ 77,663     $ 106,257     $ 105,209  
 
   
     
     
 
Net income allocated to:
                       
 
Preferred partner
  $ 4,312     $ 4,312     $ 4,312  
 
   
     
     
 
 
General and limited partners
  $ 73,351     $ 101,945     $ 100,897  
 
   
     
     
 
Basic net income per common operating partnership unit:
                       
 
Income from continuing operations
  $ 1.09     $ 1.53     $ 1.52  
 
Income from discontinued operations
    0.02       0.02       0.02  
 
   
     
     
 
Net income per common operating partnership unit-basic
  $ 1.11     $ 1.55     $ 1.54  
 
   
     
     
 
Weighed average number of common operating partnership units-basic
    65,898       65,872       65,568  
 
   
     
     
 
Diluted net income per common operating partnership unit:
                       
 
Income from continuing operations
  $ 1.09     $ 1.52     $ 1.51  
 
Income from discontinued operations
    0.02       0.02       0.02  
 
   
     
     
 
Net income per common operating partnership unit-diluted
  $ 1.11     $ 1.54     $ 1.53  
 
   
     
     
 
Weighed average number of common operating partnership units-diluted
    66,098       66,132       65,759  
 
   
     
     
 

     See accompanying notes to financial statements.

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ARDEN REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands, except unit amounts)
                                                         
                                            Accumulated        
                                    Receivable   Other        
    Preferred   Limited   General   Deferred   from General   Comprehensive        
    Partner   Partners   Partner   Compensation   Partner   Loss   Total
   
 
 
 
 
 
 
Balance at January 1, 2000
  $ 50,000     $ 43,134     $ 1,398,773     $     $ (2,167 )   $     $ 1,489,740  
Issuance costs
                (119 )                       (119 )
Distributions
    (4,312 )     (3,968 )     (118,531 )                       (126,811 )
Contributions
          550                               550  
Receivables and interest from general partner
                            2,167             2,167  
Redemption of units
                (1,920 )                       (1,920 )
Stock compensation
                9,459       (9,459 )                  
Amortization of stock compensation
                      586                   586  
Net income
    4,312       3,330       97,567                         105,209  
Redemption adjustment
          11,583       (11,583 )                        
 
   
     
     
     
     
     
     
 
Balance at December 31, 2000
    50,000       54,629       1,373,646       (8,873 )                 1,469,402  
Common OP Units converted
          (6,586 )     6,586                          
Distributions
    (4,312 )     (4,182 )     (123,234 )                       (131,728 )
Stock compensation
                2,533       (2,533 )                  
Amortization of stock compensation
                      2,273                   2,273  
Stock options exercised
                463                         463  
Net income
    4,312       3,283       98,662                         106,257  
Redemption adjustment
          1,582       (1,582 )                        
 
   
     
     
     
     
     
     
 
Balance at December 31, 2001
    50,000       48,726       1,357,074       (9,133 )                 1,446,667  
Common OP Units converted
          (2,270 )     2,270                          
Distributions
    (4,312 )     (3,527 )     (129,153 )                       (136,992 )
Stock compensation
                4,815       (4,815 )                  
Amortization of stock compensation
                      1,444                   1,444  
Forfeitures
                (1,245 )     1,245                    
Stock options exercised
                9,078                         9,078  
Stock repurchases
                (40,693 )                       (40,693 )
Unrealized loss on interest rate Swaps
                                  (2,768 )     (2,768 )
Net income
    4,312       1,944       71,407                         77,663  
 
                                                   
 
Comprehensive income
                                        74,895  
Redemption adjustment
          (6,845 )     6,845                          
 
   
     
     
     
     
     
     
 
Balance at December 31,2002
  $ 50,000     $ 38,028     $ 1,280,398     $ (11,259 )   $     $ (2,768 )   $ 1,354,399  
 
   
     
     
     
     
     
     
 

     See accompanying notes to financial statements.

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ARDEN REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                             
        Year Ended December 31,
       
        2002   2001   2000
       
 
 
Operating Activities:
                       
Net income
  $ 77,663     $ 106,257     $ 105,209  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
 
Minority interest
    110       127       144  
 
Depreciation and amortization, including discontinued operations
    111,418       101,819       87,267  
 
Amortization of loan costs and fees
    3,807       3,568       3,568  
 
Gain on sale of property
    (1,967 )     (4,591 )     (2,132 )
 
Amortization of deferred compensation
    1,199       1,938       586  
 
Changes in operating assets and liabilities:
                       
   
Rent and other receivables
    20,263       3,775       (1,080 )
   
Due from general partner
    (1,170 )     (888 )     1,076  
   
Deferred rent
    (4,657 )     (7,401 )     (7,656 )
   
Prepaid financing costs, expenses and other assets
    (2,997 )     (4,366 )     (7,480 )
   
Accounts payable and accrued expenses
    9,728       4,388       11,359  
   
Security deposits
    962       213       3,397  
 
   
     
     
 
Net cash provided by operating activities
    214,359       204,839       194,258  
 
   
     
     
 
Investing Activities:
                       
Acquisitions and improvements to commercial properties
    (251,534 )     (161,785 )     (227,707 )
Proceeds from sales of properties
    24,287       45,931       11,683  
 
   
     
     
 
Net cash used in investing activities
    (227,247 )     (115,854 )     (216,024 )
 
   
     
     
 
Financing Activities:
                       
Proceeds from term loan
    125,000              
Proceeds from mortgage loans
                45,053  
Repayment of mortgage loans
    (2,798 )     (2,603 )     (209,804 )
Proceeds from unsecured lines of credit
    255,937       140,500       238,000  
Repayments of unsecured lines of credit
    (227,700 )     (213,500 )     (273,500 )
Proceeds from issuances of unsecured senior notes, net of discount
          149,064       348,364  
(Increase) decrease in restricted cash
    (1,730 )     599       (854 )
Proceeds from issuance of common partnership units
    9,078       463        
Repurchase of common partnership units
    (40,693 )            
Distributions to minority interests
    (192 )     (172 )     (186 )
Distributions to preferred operating partnership unit holders
    (4,312 )     (4,312 )     (4,312 )
Distributions and redemptions paid to common partnership unit holders
    (132,680 )     (127,415 )     (122,500 )
Preferred operating partnership units issuance cost
                (119 )
 
   
     
     
 
Net cash (used in) provided by financing activities
    (20,090 )     (57,376 )     20,142  
 
   
     
     
 
Net (decrease) increase in cash and cash equivalents
    (32,978 )     31,609       (1,624 )
Cash and cash equivalents at beginning of period
    37,041       5,432       7,056  
 
   
     
     
 
Cash and cash equivalents at end of period
  $ 4,063     $ 37,041     $ 5,432  
 
   
     
     
 
Supplemental Disclosure of Cash Flow Information:
                       
Cash paid during the period for interest, net of amount capitalized
  $ 94,007     $ 83,809     $ 70,139  
 
   
     
     
 

     See accompanying notes to financial statements.

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ARDEN REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Business

  Description of Business

     The terms “us”, “we” and “our” as used in these financial statements refer to Arden Realty Limited Partnership. The term “Arden Realty” refers to Arden Realty, Inc.

  Organization and Formation

     We are an operating partnership that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. Arden Realty, a real estate investment trust, or REIT, is our sole general partner and, as of December 31, 2002 and 2001, owned 97.3% and 97.2%, respectively, of our common partnership units, or common OP Units. Arden Realty conducts substantially all of its operations through us and our subsidiaries. Commencing with its taxable year ended December 31, 1996, Arden Realty has operated and qualified as a REIT for federal income tax purposes.

     As of December 31, 2002 our portfolio consisted of 137 primarily suburban office properties and 223 buildings containing approximately 19.4 million net rentable square feet including one development property with approximately 283,000 square feet under lease-up. As of December 31, 2002, our properties were 90.1% occupied.

     Arden Realty’s interest in us entitles it to share in cash distributions from, and in our profits and losses in proportion to its percentage ownership. Certain individuals and entities own our remaining common OP Units, including Messrs. Ziman and Coleman, our Chairman and Chief Executive Officer and our President and Chief Operating Officer, respectively, together with other entities and persons who were issued common OP Units in connection with our acquisition of specific properties previously owned by those entities and persons. Each limited partner holding common OP Units is entitled to cause us to redeem the limited partner’s common OP Units for cash. Arden Realty, however, may, instead of paying cash, elect to exchange those common OP Units for shares of its common stock on a one-for-one basis, subject to certain limitations. With each redemption or exchange of common OP Units, Arden Realty’s percentage interest in us will increase.

     As our sole general partner, Arden Realty generally has the exclusive power under our partnership agreement to manage us and conduct our business, subject to limited exceptions. Arden Realty’s board of directors manages our affairs. We cannot be terminated until the year 2096 without the approval of a majority of our partners or in connection with the sale of all or substantially all of our assets, a business combination, a judicial decree or the redemption of all the common OP Units held by our limited partners.

     We are a Maryland limited partnership. Arden Realty is a Maryland corporation. Arden Realty’s common stock is listed on the New York Stock Exchange under the symbol “ARI.”

2.   Basis of Presentation and Summary of Significant Accounting Policies

  Basis of Presentation

     The accompanying consolidated financial statements include our accounts and our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

     We consolidate all entities for which we have controlling financial interest as measured by a majority of the voting interest. For entities in which the controlling financial interest is not clearly indicated by ownership of a majority of the voting interest, we would consolidate those entities for which we own a majority of the financial interest in profits or losses or entities that we control by agreement.

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     Arden Realty and us currently own 100% of all of our consolidated subsidiaries and do not have any unconsolidated investments other than an investment in the securities of a non-publicly traded company. This investment represents approximately 5.8% of the total equity outstanding for this particular company. Because we do not control this company contractually nor exert significant influence over its operating and financial policies, we account for this investment under the cost method of accounting.

  Risks and Uncertainties

     The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Our properties are all located in Southern California. As a result of our geographic concentration, the operations of these properties could be affected by the economic conditions in this region.

  Segment Information

     We view our operations as principally one segment, namely the operation of commercial real estate located in Southern California, and the financial information disclosed herein represents all of the financial information related to this principal operating segment.

  Commercial Properties

     Our properties are stated at depreciated cost. Write-downs to estimated fair value are recognized whenever a property’s estimated undiscounted future cash flows are less than it’s book value. Prior to the year ended December 31, 2001, properties held for disposition were carried at the lower of their depreciated cost or fair value less their cost to sell. Beginning January 1, 2002, we implemented Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), which was required to be adopted in fiscal years beginning after December 15, 2001 and which supercedes Statement of Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (SFAS 121). As a result, we will continue to carry properties held for disposition at the lower of their depreciated cost or fair value less cost to sell in accordance with SFAS 144. Based on our assessment, no write-downs to estimated fair value were necessary as of December 31, 2002 and 2001, respectively. The implementation of SFAS 144 did not significantly impact our results of operation or financial position, however, its adoption impacted the conformity of our current year operating results presentation to prior years as discussed in footnote 3 below.

     Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development related costs incurred during construction periods are capitalized and depreciated on the same basis as the related assets.

     Repair and maintenance costs are charged to expenses as incurred and significant replacements and betterments are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of a an asset or increase its operating efficiency. Significant replacements and betterments represent costs that extend an asset’s useful life or increase its operating efficiency.

     Depreciation is calculated under the straight-line method using depreciable lives of ten to forty seven years for building and building improvements and five-year lives for furniture, fixtures and equipment. Amortization of tenant improvements is calculated using the straight-line method over the term of the related lease.

     The carrying amount of all commercial properties is evaluated periodically to determine if adjustment to the useful life is warranted. During 2001, the useful life of certain building and building improvements were adjusted to more accurately reflect their estimated usefulness. The effect of this change in estimate in 2001 was an increase to net income of approximately $10.1 million or $0.16 per common share. This change in estimate did not have an impact on our 2001 cash flows.

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     Costs associated with leasing properties are capitalized and amortized to expense on a straight-line basis over the related lease term.

  Cash Equivalents

     Cash equivalents consist of highly liquid investments with original maturities of three months or less when acquired.

  Restricted Cash

     Restricted cash at December 31, 2002 and 2001 consists of $13.7 million in cash deposits as required by certain of our mortgage loans payable and $6.8 million and $5.1 million, respectively, in impound accounts for real estate taxes and insurance, as required by certain of our mortgage loans payable.

  Prepaid Financing Costs

     Costs associated with obtaining long-term financing are capitalized and amortized to interest expense over the term of the related loan.

  Revenue Recognition

     Minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, is recognized on a straight-line basis over the term of the related lease. Amounts expected to be received in later years are included in deferred rents. Property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs are recognized in the period the related expenses are incurred.

  Allowance for Rents and Other Receivables

     We periodically evaluate the collectibility of amounts due from tenants and 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 receivable that arises from the straight-lining of rents. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates. If estimates differ from actual results this could impact our operating results.

  Income Taxes

     Our taxable income is reportable by our partners on their separate tax returns. Accordingly, no provision has been made for income taxes in the accompanying statements of income.

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  Fair Value of Financial Instruments

     Our disclosures of estimated fair value of financial instruments at December 31, 2002 and 2001, respectively, were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

     Our cash equivalents, mortgage notes receivable, unsecured lines of credit, interest rate swap agreements, accounts payable and other financial instruments are carried at amounts that reasonably approximate their fair value amounts.

     The estimated fair value of our mortgage loans payable and unsecured senior notes is as follows (in thousands):

                                 
    December 31, 2002   December 31, 2001
   
 
    Carrying   Estimated   Carrying   Estimated
    Amount   Fair Value   Amount   Fair Value
   
 
 
 
Mortgage loans payable
  $ 570,654     $ 600,663     $ 573,452     $ 580,799  
 
   
     
     
     
 
Unsecured senior notes
  $ 498,063     $ 541,762     $ 497,681     $ 516,273  
 
   
     
     
     
 

     The estimated fair value is based on interest rates available at each of the dates presented for issuance of debt with similar terms and remaining maturities. The estimated fair value amounts of our notes payable above are not necessarily indicative of the amounts that we could realize in a current market exchange.

  Interest Rate Swap Agreements

     We have periodically entered into interest rate swap agreements to effectively convert floating rate debt into fixed rate debt. Net amounts received or paid under these agreements are recognized as an adjustment to interest expense when such amounts are incurred or earned. Our objective in using interest rate swap agreements is to limit our exposure to interest rate movements. During 2002, such agreements were used to fix the floating interest rate associated with $50 million of the Wells Fargo unsecured line of credit and the entire $125 million balance of the unsecured term loan.

     Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments and for hedging activities. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting destination. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, are considered fair value hedges.

     Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

     For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss), outside of earnings and subsequently reclassified to earnings when the hedged transaction affects earnings.

     Under SFAS 133 our interest rate swap agreements are classified as cash flow hedges with their fair value as of December 31, 2002 of approximately $2.8 million reported in accumulated other comprehensive loss in our balance sheet and statement of changes in partners’ capital. This loss will be subsequently reclassified to interest expense as interest payments are made on our floating rate debt. If the underlying floating rate loans were to be repaid prior to maturity, we will recognize into interest expense the unamortized portion of this loss at the time of such early repayment.

     As of December 31, 2002, we did not have any derivatives that could be designated as fair value hedges.

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  New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations” (SFAS 141) and SFAS No. 142 “Goodwill and Other Intangible Assets,” (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, the amortization of goodwill, including goodwill recorded in past business combinations, was to be discontinued upon adoption and all goodwill and intangible assets were to be tested for impairment. These pronouncements affect the accounting of operating leases acquired as part of real estate acquisitions. Under these pronouncements, to the extent that the existing operating leases at the time of a property acquisition have rental rates, including lease origination costs, above or below current market rates, those leases are required to be marked-to-market with the resulting adjustment amortized into rents over each adjusted lease’s remaining term.

     As discussed in footnote 3 below, we acquired five properties during 2002 for a total purchase price of approximately $135.0 million. We performed a lease-by-lease analysis for the properties acquired in 2002 and determined that the in-place rents for leases acquired approximate market rents. Consequently the adoption of SFAS 141 and 142 did not have a significant impact on our consolidated financial statements.

     In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145). SFAS 145 rescinds Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” In addition, 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 provisions of SFAS 145 are effective for 2003. We do not expect that the adoption of this statement will have a significant impact on our consolidated financial statements.

     In June 2002, FASB issued SFAS No. 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. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred based on the present value of the expected contingent payment under the guarantee. The provisions of SFAS 146 are effective for 2003. We do not expect that the adoption of this statement will have a significant impact on our consolidated financial statements.

     In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires guarantees and indemnification agreements meeting the characteristics described in FIN 45 to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make new disclosures for guarantees, even if the likelihood of the guarantor having to make payment under the guarantee is remote. The disclosure requirements within FIN 45 are effective for 2002 and its adoption is required for 2003 on a prospective basis to guarantees issued or modified after December 31, 2002. We adopted the disclosure provisions of FIN 45 in 2002. We do not expect that the adoption of this statement will have a significant impact on our consolidated financial statements.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148) which amends SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and requires disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. We have adopted the disclosure provisions of SFAS 148 (see footnote 11). Beginning January 1, 2003, we will adopt the prospective transition method for all new stock compensation awards. We do not anticipate that adoption of SFAS 148 will have a significant impact on our consolidated financial statements.

     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 through voting rights and how to determine when and which business enterprise should consolidate such an entity. This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not

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have 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 effective for 2003. We do not expect that the adoption of this statement will have a significant impact on our consolidated financial statements.

     Reclassifications

     Certain prior year amounts have been reclassified to confirm with the current year presentation.

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3.   Commercial Properties

            Property Acquisitions

                                 
            Date of   Property   Square   Purchase Price
Property   County   Submarket   Purchase   Type   Feet   ($000's)

 
 
 
 
 
 
Gateway Towers   Los Angeles   Torrance   August 7, 2002   Office     432,894     $ 62,500  
Gateway Land Parcel   Los Angeles   Torrance   August 7, 2002   Developable Land     N/A       3,500  
Crossroads   San Diego   Mission Valley   August 16, 2002   Office     133,566       16,900  
Governor Executive Center   San Diego   Governor Park   August 16, 2002   Office     52,195       11,200  
Carmel Valley Center I & II   San Diego   Del Mar Heights   August 30, 2002   Office     107,197       28,400  
Carmel View Office Plaza   San Diego   Rancho Bernardo   August 30, 2002   Office     77,460       12,500  
                     
     
 
         Total                     803,312     $ 135,000  
                     
     
 

  Property Dispositions

                                 
                            Sales
                Property   Square   Price
Property   County   Submarket   Date of Sale   Type   Feet   ($000's)

 
 
 
 
 
 
Harbor Corporate Center   Los Angeles   Torrance   March 7, 2002   Office     63,925     $ 6,900  
Renaissance Court   Los Angeles   Simi /Conejo Valley   April 16, 2002   Office     61,245       8,300  
6800 Owensmouth   Los Angeles   West San Fernando Valley   May 1, 2002   Office     80,014       8,400  
2730 Wilshire Apartments   Los Angeles   Santa Monica   November 1, 2002   Apartment     (1)     2,300  
                     
     
 
         Total                     205,184     $ 25,900  
                     
     
 


(1)   Consists of 16 apartment units.

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     Discontinued Operations and Properties held for Disposition

     As discussed above, we adopted SFAS 144 effective January 1, 2002 which requires, among other things, that the operating results of real estate properties classified as held for disposition subsequent to January 1, 2002 be included in discontinued operations in the statements of income for all periods presented. SFAS 144 provides that long-lived assets classified as held for disposition as a result of disposal activities that were initiated prior to January 1, 2002, are to be accounted for in accordance with SFAS 121. Accordingly, the operating results for the properties held for disposition and sold prior to December 31, 2002 are included in income from continuing operations for the years ended December 31, 2002, 2001 and 2000. Consequently, in order to increase the comparability of our consolidated statements of income for the years ended December 31, 2002, 2001 and 2000, the tables below summarize the operating results of our one property currently classified as discontinued operations and the properties sold since January 1, 2000 that would have qualified as discontinued operations under SFAS 144.

     As of December 31, 2002, properties held for disposition consists of one property representing approximately 140,000 rentable square feet.

     The results of operations for the property held for disposition as of December 31, 2002 classified as discontinued operations for the years ended December 31 2002, 2001 and 2000 are as follows (in thousands):

                         
    2002   2001   2000
   
 
 
Revenues
  $ 4,165     $ 4,040     $ 3,968  
Property operating Expenses
    (1,495 )     (1,490 )     (1,405 )
Depreciation and amortization
    (1,215 )     (1,044 )     (1,320 )
 
   
     
     
 
Discontinued operations
  $ 1,455     $ 1,506     $ 1,243  
 
   
     
     
 

     The results of operations for the properties sold since January 1, 2000 that would have qualified as discontinued operations under SFAS 144 for the years ended December 31, 2002, 2001 and 2000 were as follows (in thousands, except number of properties):

                         
    2002   2001   2000
   
 
 
Revenues
  $ 1,111     $ 7,744     $ 10,748  
Property operating Expenses
    (498 )     (3,015 )     (3,537 )
Depreciation and amortization
    (39 )     (1,115 )     (69 )
Gain on sale of properties
    1,967       4,592       2,118  
 
   
     
     
 
Net Income
  $ 2,541     $ 8,206     $ 9,260  
 
   
     
     
 
Number of properties
    4 (1)     14       15  
Net rentable square feet
    205       778       854  



(1)   Includes one apartment building sold in November 2002.

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     Capitalized Interest

     We capitalize interest and taxes related to buildings under construction and renovation to the extent those assets qualify for capitalization.

     Total interest incurred and the amount capitalized for the years ended December 31, 2002, 2001, and 2000 were as follows (in thousands):

                         
    2002   2001   2000
   
 
 
Total interest incurred
  $ 94,162     $ 93,290     $ 91,052  
Interest capitalized
    (5,646 )     (9,095 )     (12,646 )
 
   
     
     
 
Interest expensed
  $ 88,516     $ 84,195     $ 78,406  
 
   
     
     
 

     Future Minimum Lease Payments

     Future minimum lease payments to be received under noncancelable operating leases existing as of December 31, 2002, are as follows (in thousands):

         
2003
  $ 335,744  
2004
    277,602  
2005
    211,061  
2006
    154,519  
2007
    110,071  
Thereafter
    275,500  

     The above future minimum lease payments do not include payments received for tenant reimbursements of specified operating expenses.

     We lease the land underlying the office buildings or parking structures at six of our buildings. Ground lease expense, including amounts netted against parking revenues, was approximately $1.9 million, $2.9 million and $2.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Future minimum ground lease payments due under existing ground leases are as follows (in thousands):

         
2003
  $ 1,754  
2004
    1,785  
2005
    1,815  
2006
    1,840  
2007
    1,865  
Thereafter
    112,801  

4.   Mortgage Notes Receivable

     In September 1997, we purchased two mortgage notes receivable, secured by a single commercial office property, with an aggregate balance of approximately $17.6 million, for approximately $14.4 million. The notes bore interest at the Eleventh District Cost of Funds (as defined) plus 3.25% per annum, require monthly payments of principal, interest, and additional net cash flow from the office property and mature on May 31, 2004. These notes were repaid in full by the borrower in October 2002. As a result of this redemption, we recognized as income the unamortized purchase discount on these notes at the time of repurchase totaling approximately $750,000.

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5.   Mortgage Loans and Unsecured Indebtedness

     A summary of mortgage loans payable, unsecured lines of credit and unsecured senior notes is as follows:

                                                   
                      Stated Annual           Number of   Maturity
      December 31,   December 31,   Interest Rate at   Rate   Properties   Month/
Type of Debt   2002   2001   December 31, 2002   Fixed/Floating   Securing Loan   Year

 
 
 
 
 
 
      ($000's)                                
Mortgage Loans Payable:
                                               
Fixed Rate
                                               
Mortgage Financing I (1)
  $ 175,000     $ 175,000       7.52 %   Fixed     18       6/04  
Mortgage Financing III (2)
    136,100       136,100       6.74 %   Fixed     22       4/08  
Mortgage Financing IV (2)
    111,200       111,200       6.61 %   Fixed     12       4/08  
Mortgage Financing V (3)
    108,153       110,253       6.94 %   Fixed     12       4/09  
Mortgage Financing VI (3)
    21,816       22,036       7.54 %   Fixed     3       4/09  
Activity Business Center (3)
    7,580       7,737       8.85 %   Fixed     1       5/06  
145 South Fairfax (3)
    3,952       3,987       8.93 %   Fixed     1       1/27  
Marin Corporate Center (3)
    2,850       2,966       9.00 %   Fixed     1       7/15  
Conejo Business Center (3)
    2,795       2,911       8.75 %   Fixed   (Note 4)     7/15  
Conejo Business Center (3)
    1,208       1,262       7.88 %   Fixed   (Note 4)     7/15  
 
   
     
                                 
 
    570,654       573,452                                  
Unsecured Term Loan:
                                               
Fixed Rate
                                               
Wells Fargo - $125 mm (1), (5)
    125,000             3.64 %   Fixed (Note 6)           6/04  
Unsecured Lines of Credit:
                                               
Floating Rate
                                               
Wells Fargo - $310mm (1)
    208,587       105,350       2.83 %   LIBOR + 1.00% (Notes 7,8)           4/06  
Lehman Brothers - $75 mm (9)
          75,000           LIBOR + 1.30%           7/02  
City National Bank - $10 mm (1)
                    Prime Rate - 0.875%           8/03  
 
   
     
                                 
 
    208,587       180,350                                  
Unsecured Senior Notes:
                                               
Fixed Rate
                                               
2005 Notes (10)
    199,769       199,667       8.88 %   Fixed           3/05  
2007 Notes (10)
    149,245       49,663       7.00 %   Fixed           11/07  
2010 Notes (10)
    49,704       99,262       9.15 %   Fixed           3/10  
2010 Notes (10)
    99,345       149,089       8.50 %   Fixed           11/10  
 
   
     
                                 
 
    498,063       497,681                                  
 
   
     
                                 
 
     Total Debt
  $ 1,402,304     $ 1,251,483                                  
 
   
     
                                 



(1)   Requires monthly payments of interest only, with outstanding principal balance due upon maturity.
 
(2)   Requires monthly payments of interest only for five years and monthly payments of principal and interest thereafter.
 
(3)   Requires monthly payments of principal and interest.
 
(4)   Both mortgage loans are secured by the Conejo Business Center property.
 
(5)   This loan has a two-year extension option.
 
(6)   In 2002, we entered into interest rate swap agreements that fixed the interest rate on the entire balance of this loan at 3.64% in 2003, 4.18% in 2004, 4.75% in 2005 and 4.90% in 2006.
 
(7)   This line of credit also has annual 20 basis points facility fee on the $310 million commitment amount.
 
(8)   In 2002, we entered into interest rate swap agreements that fixed the interest rate on $50 million of the outstanding balance on this line of credit at 4.06% through April of 2006.
 
(9)   This line of credit was repaid in June 2002.
 
(10)   Requires semi-annual interest payments only, with principal balance due upon maturity.

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     On June 13, 2002, we closed on a $75 million unsecured term loan with Wells Fargo. This loan matures in June 2004, has a two-year extension option and bears interest at LIBOR + 1.25% during the initial term and LIBOR + 1.45% during the extension period. On September 25, 2002, we increased this term loan by an additional $50 million. The initial $75 million in proceeds from this loan were used to repay the outstanding balance on our Lehman Brothers unsecured line of credit that was scheduled to mature in July 2002. The additional $50 million in borrowings were used to pay down our Wells Fargo unsecured line of credit.

     On August 9, 2002, we renewed and increased our unsecured line of credit with a group of banks led by Wells Fargo. The renewed line of credit provides for borrowings up to $310 million with an option to increase the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including an annual facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the line of credit) depending on our unsecured debt rating. This new line of credit amends the previous $275 million unsecured line of credit that was scheduled to mature in April 2003. This new line of credit matures in April 2006. In addition, as long as we maintain an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby the lenders may bid on the interest rate to be charged for up to $150 million of the unsecured line of credit. We also have the option to convert the interest rate on this line of credit to the higher of Wells Fargo’s prime rate or the Federal Funds rate plus 0.5%. As of December 31, 2002, there was approximately $208.6 million outstanding on this line of credit and approximately $111.4 million was available for additional borrowings.

     During the fourth quarter of 2002, we entered into interest rate swap agreements totaling $175 million that fixed the floating interest rates on $50 million of our unsecured line of credit and all of our $125 million unsecured term loan. This has decreased our interest rate exposure by approximately 50%, from 22% of total indebtedness as of September 30, 2002 to approximately 11% at December 31, 2002. As a result of these transactions, $50 million of our line of credit will now bear interest at 4.06% through the maturity of the line in April of 2006 and our $125 million term loan will now bear interest at 3.64% in 2003, 4.18% in 2004, 4.75% in 2005 and 4.9% from January through June of 2006.

     Following is a summary of scheduled principal payments for our total debt outstanding as of December 31, 2002 ($000’s):

         
Year Ended        
December 31,   Amount

 
2003
  $ 5,461  
2004
    307,062  
2005
    207,678  
2006
    223,649  
2007
    158,681  
Thereafter
    499,773  
 
   
 
 
  $ 1,402,304  
 
   
 

6.   Partners’ Capital

     A common operating partnership unit, or common OP Unit, and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the operating partnership. A common OP Unit may be redeemed for cash or, at our election, for shares of common stock on a one-for-one basis.

     During the year ended December 31, 2002, Arden Realty redeemed an aggregate of 121,875 common OP units for shares of its common stock.

     Included on our partners’ capital balance is $50 million of 8 5/8% Series B Cumulative Redeemable Preferred Operating Partnership Units, or Preferred OP Units. These Preferred OP Units were issued in September of 1999, are callable by us after five years and are exchangeable after ten years by the holder into our 8 5/8% Series B Cumulative Redeemable Preferred Stock, on a one-for-one basis. The Preferred OP Units have no stated maturity or mandatory redemption and are subordinate to all debt.

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     On January 1, 2002, we extended the vesting period of a total of 477,600 unvested restricted stock awards granted to several key executive officers in 2000 and 2001, from their initial four-year and five-year vesting periods to a ten-year vesting period from their initial grant date.

     On February 28, 2002 Arden Realty issued a total of 182,500 restricted stock awards to several key executive officers. Holders of these shares have full voting rights and will receive any dividends paid but are prohibited from selling or transferring unvested shares. Of the 182,500 restricted shares awarded, 15,500 shares vest equally over three years and 167,000 shares vest equally over ten years. The fair market value on the date of the grant for these restricted shares was $25.70 per share. On July 15, 2002, each non-employee director of Arden Realty was granted 1,000 shares of restricted stock under Arden Realty’s Stock Option and Incentive Plan as part of their annual compensation. The fair market value on the date of the grant for these restricted shares was $25.09 per share. These restricted stock awards will vest equally on the anniversary date of the awards over five years.

     We recorded deferred compensation charges totaling approximately $4.8 million during 2002 for the grants described above based on the market value of these shares on the dates of award and will amortize the compensation charges to expense on a straight-line basis over the respective vesting periods.

     On July 24, 2002 Arden Realty’s Board of Directors authorized a common stock repurchase program pursuant to which it was authorized to purchase up to $75 million of its common stock over the following 12 months. As part of this repurchase program, Arden Realty acquired 1,796,000 shares of its common stock at an average price of approximately $22.66 per share during the year ended December 31, 2002.

     In 2002, we made distributions totaling $2.005 per common OP Unit.

7.   Commitments and Contingencies

  Capital Commitments

     As of December 31, 2002, we had approximately $3.9 million outstanding in capital commitments related to tenant improvements, renovation costs and general property-related capital expenditures.

  Litigation

     We are presently subject to various lawsuits, claims and proceedings of a nature considered normal to our ordinary course of business. We expect most of these legal proceedings to be covered by our liability insurance. The most significant of these contingencies not covered by insurance is described below.

     In December 2001, the owner of the entertainment center at our Howard Hughes Center project asserted a claim against us for indemnification arising out of a Los Angeles Superior Court judgment against them, which invalidated a transfer of in-lieu credits that Arden Realty made in August of 1999 as part of our sale of the land for the entertainment center. The value of these in-lieu credits was approximately $6.0 million and were transferred to satisfy certain Transportation Impact Assessment fees related to the entertainment center. On January 17, 2003 the California Court of Appeal reversed the Superior Court’s judgment, rendering the indemnification claim moot. On January 23, 2003, the plaintiff in the original lawsuit filed a petition for rehearing with the California Court of Appeal. On February 8, 2003, the California Court of Appeal denied the petition hearing.

     Based on our review of the current facts and circumstances and advice of our outside counsel, we are not able to express an opinion as to the ultimate outcome of this matter. However, we do not believe that the resolution of this matter or any of our ongoing legal proceedings will have a material adverse effect on our consolidated results of operations, cash flow or financial position.

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  Concentration of Credit Risk

     We maintain our cash and cash equivalents at financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management believes that the risk is not significant.

     We generally do not require collateral or other security from our tenants, other than security deposits or letters of credit.

8.   Related Party Transactions

  Promissory Notes Receivable from Officers

     In March 2002, Mr. Andrew Sobel, our Executive Vice President – Strategic Planning and Operations, replaced a note due to us in the amount of $194,936 bearing interest at 6.56% per annum that matured in February of 2002 with a new note for the same principal amount bearing interest at LIBOR + 1.10% per annum and maturing in March 2007.

     On July 19, 2001 and September 28, 2001, four officers executed promissory notes totaling approximately $416,000 primarily for the purpose of meeting payroll taxes due upon the vesting of stock grants. These notes mature between July 19, 2006 and September 28, 2011 and bear interest at an annual rate of between 5.75% and 6.00%. In February 2002, two of these notes to us totaling approximately $125,000 were repaid in full, including accrued interest. The remaining loans are personally guaranteed by the respective officers and are included as part of other receivables in our balance sheet at December 31, 2002.

9.   Revenue from Rental Operations and Property Operating Expenses

     Revenue from rental operations and property operating expenses for the years ended December 31, 2002, 2001 and 2000 are summarized as follows ($000’s):

                           
      2002   2001   2000
     
 
 
REVENUE FROM RENTAL OPERATIONS:
                       
 
Scheduled Rents
  $ 352,682     $ 343,224     $ 317,413  
 
Straight-line Rents
    5,348       9,120       7,920  
 
Tenant reimbursements
    24,968       22,683       16,454  
 
Parking, net of expenses
    20,814       21,256       17,575  
 
Other rental operations
    8,242       18,202       21,260  
 
   
     
     
 
 
    412,054       414,485       380,622  
 
   
     
     
 
PROPERTY OPERATING EXPENSES:
                       
 
Repairs and maintenance
    39,422       36,151       34,874  
 
Utilities
    35,726       33,579       29,598  
 
Real estate taxes
    29,921       29,089       26,362  
 
Insurance
    8,116       5,685       4,171  
 
Ground rent
    895       1,885       1,214  
 
Administrative
    15,643       14,697       13,293  
 
   
     
     
 
 
    129,723       121,086       109,512  
 
   
     
     
 
 
  $ 282,331     $ 293,399     $ 271,110  
 
   
     
     
 

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10.   Earnings Per Common OP Unit

     The following table sets forth the computation of basic and diluted net income per common OP unit for the years ended December 31, 2002, 2001 and 2000 (in thousands, except per share amounts):

                           
      2002   2001   2000
     
 
 
Income from continuing operations
  $ 76,208     $ 104,751     $ 103,966  
Discontinued operations
    1,455       1,506       1,243  
 
   
     
     
 
Net income
  $ 77,663     $ 106,257     $ 105,209  
 
   
     
     
 
Weighted average common OP units-basic
    65,898       65,872       65,568  
Weighted average diluted stock options
    200       260       191  
 
   
     
     
 
Weighted average common OP units-diluted
    66,098       66,132       65,759  
 
   
     
     
 
Basic net income per common OP unit:
                       
 
Income from continuing operations
  $ 1.09     $ 1.53     $ 1.52  
 
Income from discontinued operations
    0.02       0.02       0.02  
 
   
     
     
 
Net income per common OP unit-basic
  $ 1.11     $ 1.55     $ 1.54  
 
   
     
     
 
Diluted net income per common OP unit:
                       
 
Income from continuing operations
  $ 1.09     $ 1.52     $ 1.51  
 
Income from discontinued operations
    0.02       0.02       0.02  
 
   
     
     
 
Net income per common OP unit-diluted
  $ 1.11     $ 1.54     $ 1.53  
 
   
     
     
 

     See discussion of discontinued operations in footnote 3 above.

11.   Stock Option Plan

     Prior to December 31, 2002 we elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for our employee and directors stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement 123”) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of employee and director stock options we granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. As discussed in footnote 2 above, beginning on January 1, 2003 Arden Realty will account for its stock options issued to employees and directors after such date under the provisions of SFAS 148.

     Arden Realty established a stock option plan for the purpose of attracting and retaining executive officers, directors and other key employees. As of December 31, 2002, 6,500,000 of its authorized shares of common stock have been reserved for issuance under that plan.

     All holders of the above options have a ten-year period to exercise such options and all options were granted at exercise prices equal to the market prices at the date of the grant.

     Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if we had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rate of 4.28%, 4.39% and 6.13%, dividend yield of 7.80%, 7.60% and 7.75% and a volatility factor of the expected market price of our common stock of .190,  .191 and .198. The weighted average expected life of the options is approximately seven years.

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     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restriction and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee and director stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee and director stock options.

     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. Our pro forma information for the years ended December 31, 2002, 2001 and 2000 follows (in thousands, except earnings per common OP Unit information):

                         
    2002   2001   2000
   
 
 
Net income allocated to general partner
  $ 73,351     $ 101,945     $ 100,897  
Stock based compensation costs assuming fair value method
    1,477       2,099       4,444  
 
   
     
     
 
Pro forma net income
  $ 71,874     $ 99,846     $ 96,453  
 
   
     
     
 
Pro forma net income per common OP Unit
  $ 1.09     $ 1.51     $ 1.47  
 
   
     
     
 

     A summary of Arden Realty’s stock option activity, and related information for the years ended December 31, 2002, 2001 and 2000 follows:

                                                 
    2002   2001   2000
   
 
 
            Weighted-           Weighted-           Weighted-
            Average           Average           Average
    Options   Exercise   Options   Exercise   Options   Exercise
    (000s)   Price   (000s)   Price   (000s)   Price
   
 
 
 
 
 
Outstanding, beginning of period
    4,724     $ 24.43       4,396     $ 24.29       3,599     $ 23.96  
Granted
    164       25.60       381       26.80       1,367       25.05  
Exercised
    (424 )     21.40       (21 )     21.89              
Forfeited
    (275 )     25,68       (32 )     24.43       (570 )     24.72  
 
   
     
     
     
     
     
 
Outstanding at end of year
    4,189     $ 24.33       4,724     $ 24.43       4,396     $ 24.29  
 
   
     
     
     
     
     
 
Exercisable at end of the period
    3,401     $ 24.87       3,338     $ 24.58       2,514     $ 24.84  
 
   
     
     
     
     
     
 
Weighted-average fair value of options granted
  $ 1.66             $ 1.49             $ 2.13          
 
   
             
             
         

     Exercise prices for options outstanding as of December 31, 2002 ranged from $19.13 to $32.25. The weighted average remaining contractual life of those options is 6 years.

12.   Employee Retirement Savings Plan

     Effective June 12, 1997, we adopted a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code whereby participants may contribute a portion of their compensation to their respective retirement accounts in an amount not to exceed the maximum allowed under the Internal Revenue Code. The plan provides for matching contributions by us, which amounted to approximately $844,000 in 2002, $803,000 in 2001 and $517,000 in 2000. Plan participants are immediately vested in their contributions and are vested equally over four years in matching contributions by us.

13.   Subsequent Event

     On January 28, 2003, Arden Realty issued a total of 81,500 restricted stock awards to several key officers. Of the 81,500 restricted shares awarded, 48,000 shares vest equally over five years and 33,500 vest after three years (cliff vesting). We recorded a deferred compensation charge of approximately $1.7 million based on the market value of these shares on the date of award and will amortize the compensation expense on a straight-line basis over the respective vesting periods.

     On March 11, 2003, Arden Realty declared a first quarter dividend of $0.505 per share to stockholders of record

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on March 31, 2003 (unaudited).

     On March 11, 2003 we sold an approximate 140,000 square foot office property located in West Hollywood, California for approximately $32.5 million. This property was classified as held for disposition on our balance sheet at December 31, 2002. The net proceeds from this disposition were used to reduced the outstanding balance on the Wells Fargo unsecured line of credit (unaudited).

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Table of Contents

14.   Quarterly Results

Following is a quarterly summary of our revenue and expenses for the years ended December 31, 2002, 2001 and 2000. Revenue and expenses may fluctuate significantly from quarter to quarter due to our development, renovation, acquisition and sales activity (unaudited).

                                   
      For the Quarter Ended (in thousands, except share amounts)
     
      March 31, 2002   June 30, 2002   September 30, 2002   December 31, 2002
     
 
 
 
Revenue
  $ 101,197     $ 101,594     $ 103,335     $ 105,928  
Property operating expenses
    (29,877 )     (30,544 )     (34,559 )     (34,743 )
General and administrative
    (2,634 )     (2,652 )     (2,947 )     (3,571 )
Interest expense
    (21,397 )     (21,584 )     (22,403 )     (23,132 )
Depreciation and amortization
    (26,061 )     (28,548 )     (27,339 )     (28,254 )
Interest and other income
    540       512       524       966  
Gain on sale of properties
    1,192       81             694  
Minority interests
    (29 )     (32 )     (22 )     (27 )
Discontinued operations
    396       393       356       310  
 
   
     
     
     
 
Net Income
  $ 23,327     $ 19,220     $ 16,945     $ 18,171  
 
   
     
     
     
 
Net income per common OP Unit:
                               
 
Basic
  $ 0.35     $ 0.29     $ 0.26     $ 0.28  
 
   
     
     
     
 
 
Diluted
  $ 0.35     $ 0.29     $ 0.25     $ 0.28  
 
   
     
     
     
 
                                   
      For the Quarter Ended (in thousands, except share amounts)
     
      March 31, 2001   June 30, 2001   September 30, 2001   December 31, 2001
     
 
 
 
Revenue
  $ 102,134     $ 101,973     $ 104,773     $ 105,605  
Property operating expenses
    (29,496 )     (28,912 )     (31,628 )     (31,050 )
General and administrative
    (2,568 )     (2,480 )     (2,231 )     (3,804 )
Interest expense
    (21,158 )     (21,081 )     (20,819 )     (21,137 )
Depreciation and amortization
    (23,871 )     (23,873 )     (25,692 )     (27,339 )
Interest and other income
    861       764       706       610  
Gain on sale of properties
          3,551       24       1,016  
Minority interests
    (50 )     (33 )     (23 )     (21 )
Discontinued operations
    366       342       508       290  
 
   
     
     
     
 
Net Income
  $ 26,218     $ 30,251     $ 25,618     $ 24,170  
 
   
     
     
     
 
Net income per common OP Unit:
                               
 
Basic
  $ 0.38     $ 0.44     $ 0.37     $ 0.36  
 
   
     
     
     
 
 
Diluted
  $ 0.38     $ 0.44     $ 0.37     $ 0.35  
 
   
     
     
     
 
                                   
      For the Quarter Ended (in thousands, except share amounts)
     
      March 31, 2000   June 30, 2000   September 30, 2000   December 31, 2000
     
 
 
 
Revenue
  $ 88,763     $ 91,736     $ 98,121     $ 102,002  
Property operating expenses
    (25,045 )     (26,366 )     (29,152 )     (28,949 )
General and administrative
    (1,669 )     (1,625 )     (1,890 )     (3,122 )
Interest expense
    (17,852 )     (18,770 )     (20,345 )     (21,439 )
Depreciation and amortization
    (19,944 )     (20,669 )     (22,298 )     (23,036 )
Interest and other income
    855       770       948       954  
Gain on sale of property
                      2,132  
Minority interests
    (30 )     (35 )     (50 )     (29 )
Discontinued operations
    410       157       316       360  
 
   
     
     
     
 
Net income
  $ 25,488     $ 25,198     $ 25,650     $ 28,873  
 
   
     
     
     
 
Net income per common OP Unit:
                               
 
Basic
  $ 0.37     $ 0.37     $ 0.37     $ 0.44  
 
   
     
     
     
 
 
Diluted
  $ 0.37     $ 0.37     $ 0.37     $ 0.44  
 
   
     
     
     
 

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Table of Contents

15. Schedule of Commercial Properties and Accumulated Depreciation

December 31, 2002
(in thousands, except square foot data)

                                                 
                            Basis        
            Initial Costs   Step Up        
           
 
       
                                            Costs Capitalized
    Square           Buildings and           Buildings and   Subsequent to
    Footage   Land   Improvements   Land   Improvements   Acquisition (2)
   
 
 
 
 
 
Century Park Center
    243,404     $ 7,189     $ 16,742     $     $     $ 12,559  
Beverly Atrium
    59,650       4,127       11,513       110       328       2,859  
Woodland Hills
    224,955       6,566       14,754       365       880       7,624  
222 South Harbor
    175,391       515       11,199       94       2,075       4,356  
425 West Broadway
    71,589       1,500       4,436       305       918       2,975  
1950 Sawtelle
    103,106       1,988       7,263                   3,031  
Bristol Plaza
    84,014       1,820       3,380       257       485       2,587  
16000 Ventura
    174,841       1,700       17,189       185       1,929       4,871  
5000 East Spring
    163,358             11,658             424       4,188  
70 South Lake
    100,133       1,360       9,097                   3,091  
Westwood Terrace
    135,943       2,103       16,850                   3,286  
Westlake – 5601 Lindero
    105,830       2,576       6,067                   3,322  
6100 Wilshire
    202,704       1,200       19,902                   5,851  
Calabasas Commerce Center
    126,771       1,262       9,725                   1,748  
Long Beach Airport—DF&G
    272,013             14,452                   560  
Skyview Center
    391,675       6,514       33,701                   7,494  
400 Corporate Pointe
    164,598       3,382       17,527       75       390       4,237  
5832 Bolsa
    49,355       690       3,526       15       80       1,622  
9665 Wilshire
    158,684       6,697       22,230       139       473       9,939  
701 B Street
    540,413       3,722       35,184       64       625       13,765  
100 Broadway
    191,727       4,570       15,255                   2,580  
Norwalk
    122,175       4,508       5,532                   4,347  
303 Glenoaks
    175,289       6,500       18,132                   3,780  
10351 Santa Monica
    96,251       3,080       7,906                   1,963  
2730 Wilshire
    55,080       3,515       5,944                   155  
Grand Avenue Plaza (1970)
    81,448       620       2,832                   3,804  
Burbank Executive Plaza
    60,395       1,100       4,384                   10,532  
California Federal Building
    81,243       1,500       5,981                   (5,985 )
Center Promenade
    174,837       2,310       9,266                   3,765  
Los Angeles Corporate Center
    389,293       26,781       15,139                   12,356  
5200 West Century
    310,910       2,080       9,360                   21,203  
15250 Ventura
    110,641       2,560       10,257                   3,977  
10350 Santa Monica
    42,292       861       3,456                   966  
535 N. Brand Blvd
    109,187       1,600       8,427                   12,991  
10780 Santa Monica
    92,486       2,625       7,997                   2,274  
4900 California
    155,189       4,680       14,877                   3,232  
Whittier
    135,415       3,575       10,798                   2,196  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                 
    Total Costs                                
   
                               
            Buildings and           Accumulated           Year Built/
    Land   Improvements   Total   Depreciation (1)   Encumbrances   Renovated
   
 
 
 
 
 
Century Park Center
  $ 7,189     $ 29,301     $ 36,490     $ 7,399     $       1972/94  
Beverly Atrium
    4,237       14,700       18,937       3,484       5,268 (3)     1989  
Woodland Hills
    6,931       23,258       30,189       6,554       14,564 (3)     1972/95  
222 South Harbor
    609       17,630       18,239       4,815       8,914 (3)     1986/91  
425 West Broadway
    1,805       8,329       10,134       2,192       4,734 (3)     1984  
1950 Sawtelle
    1,988       10,294       12,282       2,635       6,855 (3)     1988/95  
Bristol Plaza
    2,077       6,452       8,529       1,866       4,082 (3)     1982  
16000 Ventura
    1,885       23,989       25,874       5,661       11,634 (3)     1980/96  
5000 East Spring
          16,270       16,270       3,836             1989/95  
70 South Lake
    1,360       12,188       13,548       2,756       6,677 (3)     1982/94  
Westwood Terrace
    2,103       20,136       22,239       4,285             1988  
Westlake – 5601 Lindero
    2,576       9,389       11,965       2,131       6,225 (3)     1989  
6100 Wilshire
    1,200       25,753       26,953       5,752       11,566 (3)     1986  
Calabasas Commerce Center
    1,262       11,473       12,735       2,315       8,103 (3)     1990  
Long Beach Airport—DF&G
          15,012       15,012       2,718             1987/95  
Skyview Center
    6,514       41,195       47,709       8,426       27,604 (3)     1981/87/95  
400 Corporate Pointe
    3,457       22,154       25,611       4,340       15,583 (3)     1987  
5832 Bolsa
    705       5,228       5,933       1,209       2,675 (3)     1985  
9665 Wilshire
    6,836       32,642       39,478       6,325             1972/92/93  
701 B Street
    3,786       49,574       53,360       11,962             1982/96  
100 Broadway
    4,570       17,835       22,405       3,056       15,120 (3)     1987/96  
Norwalk
    4,508       9,879       14,387       2,149       7,186 (3)     1978/94  
303 Glenoaks
    6,500       21,912       28,412       3,921       13,104 (3)     1983/96  
10351 Santa Monica
    3,080       9,869       12,949       1,797       5,541 (3)     1984  
2730 Wilshire
    3,515       6,099       9,614       1,359       4,679 (3)     1985  
Grand Avenue Plaza (1970)
    620       6,636       7,256       1,634       5,805 (3)     1980  
Burbank Executive Plaza
    1,100       14,916       16,016       3,149       4,188 (3)     1983  
California Federal Building
    1,500       (4 )     1,496             4,188 (3)     1978  
Center Promenade
    2,310       13,031       15,341       2,517             1982  
Los Angeles Corporate Center
    26,781       27,495       54,276       6,595       21,043 (3)     1984/86  
5200 West Century
    2,080       30,563       32,643       6,487             1982/98/99  
15250 Ventura
    2,560       14,234       16,794       2,663             1970/90-91  
10350 Santa Monica
    861       4,422       5,283       779       2,280 (3)     1979  
535 N. Brand Blvd
    1,600       21,418       23,018       3,356             1973/92/1999  
10780 Santa Monica
    2,625       10,271       12,896       1,932             1984  
4900 California
    4,680       18,109       22,789       3,510             1983  
Whittier
    3,575       12,994       16,569       2,286             1982  

F-23


Table of Contents

                                                 
                            Basis        
            Initial Costs   Step Up        
           
 
       
                                            Costs Capitalized
    Square           Buildings and           Buildings and   Subsequent to
    Footage   Land   Improvements   Land   Improvements   Acquisition (2)
   
 
 
 
 
 
Clarendon Crest
    43,063       1,300       3,951                   1,127  
Noble Professional Center
    51,828       1,657       5,096                   1,086  
South Bay Centre
    202,830       4,775       14,365                   4,119  
8383 Wilshire
    417,463       13,570       45,505                   12,315  
Parkway Center I
    61,333       1,480       5,941                   1,094  
Centerpointe La Palma
    597,550       16,011       64,400                   7,457  
299 N. Euclid
    73,522       1,050       6,110                   5,576  
2800 28th Street
    103,506       2,937       9,063                   3,295  
1000 Town Center
    107,656       2,800       11,260                   1,295  
Mariner Court
    105,436       2,350       9,461                   1,867  
Pacific Gateway II
    223,731       6,287       19,191                   6,139  
1821 Dyer
    115,061       1,808       5,474                   4,499  
Crown Cabot Financial
    172,900       7,056       21,360                   8,458  
120 S. Spalding
    60,656       2,775       8,544                   6,111  
South Bay Tech
    104,815       1,600       4,782                   1,200  
1370 Valley Vista
    84,081       2,698       8,141                   1,601  
Foremost Professional Plaza
    60,534       2,049       6,196                   1,035  
Northpoint
    104,235       1,800       20,272                   1,794  
Pennsfield Plaza
    21,202       800       2,383                   341  
Conejo Business Center
    69,017       2,489       7,359                   1,164  
Marin Corporate Center
    51,360       1,956       5,915                   885  
145 South Fairfax
    53,994       1,825       5,551                   1,486  
Bernardo Regency
    47,916       1,625       4,937                   1,239  
City Centre
    302,519       8,250       24,951                   4,446  
Wilshire Pacific Plaza
    100,122       3,750       11,317                   3,492  
Glendale Corporate Center
    108,209       2,750       12,734                   2,078  
World Savings Center
    469,115             110,382                   15,680  
Beverly Sunset Medical Plaza
    139,711       7,180       21,666                   8,248  
Sunset Point Plaza
    58,105       2,075       6,362                   1,136  
Activity Business Center
    167,045       3,650       11,303                   1,727  
Westlake Gardens
    49,639       1,831       5,550                   2,597  
9100 Wilshire Boulevard
    326,227       16,250       48,950                   9,641  
Westwood Center
    313,000       3,159       24,920                   83,251  
1919 Santa Monica
    43,796       2,580       7,772                   809  
600 Corporate Pointe
    273,339       8,575       35,325                   6,172  
150 East Colorado Boulevard
    61,168       1,988       5,841                   2,046  
5161 Lankershim
    178,317       5,016       25,568                   4,572  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                 
    Total Costs                                
   
                               
            Buildings and           Accumulated           Year Built/
    Land   Improvements   Total   Depreciation (1)   Encumbrances   Renovated
   
 
 
 
 
 
Clarendon Crest
    1,300       5,078       6,378       731       3,178 (3)     1990  
Noble Professional Center
    1,657       6,182       7,839       1,120       3,580 (3)     1985/93  
South Bay Centre
    4,775       18,484       23,259       3,354       12,978 (3)     1984  
8383 Wilshire
    13,570       57,820       71,390       10,638             1971/93  
Parkway Center I
    1,480       7,035       8,515       1,328       5,029 (3)     1992/95  
Centerpointe La Palma
    16,011       71,857       87,868       12,328       33,832 (3)     1986/88/90  
299 N. Euclid
    1,050       11,686       12,736       2,418             1983  
2800 28th Street
    2,937       12,358       15,295       2,263             1979  
1000 Town Center
    2,800       12,555       15,355       1,977             1989  
Mariner Court
    2,350       11,328       13,678       2,162       6,959 (3)     1989  
Pacific Gateway II
    6,287       25,330       31,617       5,047             1982/90  
1821 Dyer
    1,808       9,973       11,781       1,701             1980/88  
Crown Cabot Financial
    7,056       29,818       36,874       5,169             1989  
120 S. Spalding
    2,775       14,655       17,430       3,306       8,299 (3)     1984  
South Bay Tech
    1,600       5,982       7,582       912             1984  
1370 Valley Vista
    2,698       9,742       12,440       1,678       5,532 (3)     1988  
Foremost Professional Plaza
    2,049       7,231       9,280       1,210             1992  
Northpoint
    1,800       22,066       23,866       3,456             1991  
Pennsfield Plaza
    800       2,724       3,524       251             1989  
Conejo Business Center
    2,489       8,523       11,012       811       4,003       1991  
Marin Corporate Center
    1,956       6,800       8,756       623       2,850       1986  
145 South Fairfax
    1,825       7,037       8,862       1,019       3,952       1984  
Bernardo Regency
    1,625       6,176       7,801       967             1986  
City Centre
    8,250       29,397       37,647       4,297             1982  
Wilshire Pacific Plaza
    3,750       14,809       18,559       2,793             1976/87  
Glendale Corporate Center
    2,750       14,812       17,562       2,391             1985  
World Savings Center
          126,062       126,062       19,417             1983  
Beverly Sunset Medical Plaza
    7,180       29,914       37,094       4,554             1963/92-95  
Sunset Point Plaza
    2,075       7,498       9,573       1,170       3,452 (3)     1988  
Activity Business Center
    3,650       13,030       16,680       2,002       7,580       1987  
Westlake Gardens
    1,831       8,147       9,978       2,140             1998  
9100 Wilshire Boulevard
    16,250       58,591       74,841       10,182             1971/90  
Westwood Center
    3,159       108,171       111,330       6,146             1965/2000  
1919 Santa Monica
    2,580       8,581       11,161       1,227       3,724 (3)     1991  
600 Corporate Pointe
    8,575       41,497       50,072       6,527       17,692 (3)     1989  
150 East Colorado Boulevard
    1,988       7,887       9,875       1,232       4,843 (3)     1979/97  
5161 Lankershim
    5,016       30,140       35,156       4,817       13,573 (3)     1985/97  

F-24


Table of Contents

                                                 
                            Basis        
            Initial Costs   Step Up        
           
 
       
                                            Costs Capitalized
    Square           Buildings and           Buildings and   Subsequent to
    Footage   Land   Improvements   Land   Improvements   Acquisition (2)
   
 
 
 
 
 
1501 Hughes Way
    77,060       1,348       4,058                   3,279  
3901 Via Oro
    53,195       692       2,081                   1,765  
Huntington Beach Plaza
    52,186       1,109       3,317                   968  
Fountain Valley Plaza
    107,252       2,949       9,377                   2,033  
3300 Irvine Avenue
    74,224       2,215       6,697                   1,570  
Von Karman Corporate Center
    451,477       11,513       34,783                   10,553  
1503 South Coast
    60,605       1,570       4,731                   1,171  
625 The City
    139,806       4,792       14,470                   2,390  
Orange Financial Center
    305,439       10,379       34,415                   8,192  
Lambert Office Plaza
    32,807       1,095       3,296                   810  
Carlsbad Corporate Center
    125,000       3,722       15,061                   4,937  
Balboa Corporate Center
    69,890       2,759       8,303                   (117 )
Panorama Corporate Center
    133,149       6,512       19,593                   463  
Ruffin Corporate Center
    45,059       1,766       5,315                   (29 )
Skypark Office Plaza
    202,164       5,733       21,608                   2,807  
Governor Park Plaza
    104,065       3,382       10,177                   3,292  
5120 Shoreham
    37,759       1,224       4,073                   1,120  
Morehouse Tech Center
    181,207       6,841       21,067                   3,475  
Torreyana Science Park
    81,204       5,035       15,148                   363  
Waples Tech Center
    28,119       1,010       3,027                   703  
10251 Vista Sorrento
    69,386       1,839       7,202                   225  
Camarillo Business Park
    154,216       3,522       10,602                   4,273  
Centrelake Plaza
    110,763       1,570       9,473                   3,291  
Chicago Avenue Business Park
    47,482       1,223       3,687                   931  
Havengate Center
    80,557       1,913       5,759                   2,646  
HDS Plaza
    104,178       2,604       7,838                   1,394  
5702 Bolsa
    27,731       589       1,775                   99  
5672 Bolsa
    11,968       254       767                   188  
5632 Bolsa
    21,568       458       1,381                   55  
Huntington Commerce Center
    67,551       992       2,997                   575  
Savi Tech Center
    341,446       8,280       24,911                   3,210  
Yorba Linda Business Park
    167,142       2,629       7,913                   999  
Cymer Technology Center
    155,612       5,446       16,387                   2,519  
Poway Industrial
    112,000       1,876       5,646                   194  
10180 Scripps Ranch
    43,560       1,165       3,507                   216  
Via Frontera
    77,920       1,792       5,391                   1,086  
Westridge
    48,955       1,807       5,591                   728  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                 
    Total Costs                                
   
                               
            Buildings and           Accumulated           Year Built/
    Land   Improvements   Total   Depreciation (1)   Encumbrances   Renovated
   
 
 
 
 
 
1501 Hughes Way
    1,348       7,337       8,685       1,431             1983/97  
3901 Via Oro
    692       3,846       4,538       1,431             1986/97  
Huntington Beach Plaza
    1,109       4,285       5,394       635       1,509 (3)     1984/96  
Fountain Valley Plaza
    2,949       11,410       14,359       2,065       4,833 (3)     1982  
3300 Irvine Avenue
    2,215       8,267       10,482       1,452       3,244 (3)     1981/97  
Von Karman Corporate Center
    11,513       45,336       56,849       8,226       19,108 (3)     1981/84  
1503 South Coast
    1,570       5,902       7,472       781       2,262 (3)     1979/97  
625 The City
    4,792       16,860       21,652       2,865       7,055 (3)     1985/97  
Orange Financial Center
    10,379       42,607       52,986       7,058       18,184 (3)     1985/95  
Lambert Office Plaza
    1,095       4,106       5,201       701             1986/97  
Carlsbad Corporate Center
    3,722       19,998       23,720       2,323       9,327 (3)     1996  
Balboa Corporate Center
    2,759       8,186       10,945       1,034       5,831 (3)     1990  
Panorama Corporate Center
    6,512       20,056       26,568       2,596       12,833 (3)     1991  
Ruffin Corporate Center
    1,766       5,286       7,052       675       3,480 (3)     1990  
Skypark Office Plaza
    5,733       24,415       30,148       3,621             1986  
Governor Park Plaza
    3,382       13,469       16,851       2,173       5,026 (3)     1986  
5120 Shoreham
    1,224       5,193       6,417       889       3,033 (3)     1984  
Morehouse Tech Center
    6,841       24,542       31,383       3,720             1984  
Torreyana Science Park
    5,035       15,511       20,546       2,022       9,500 (3)     1980/97  
Waples Tech Center
    1,010       3,730       4,740       664             1990  
10251 Vista Sorrento
    1,839       7,427       9,266       971       3,882 (3)     1981/95  
Camarillo Business Park
    3,522       14,875       18,397       3,026       8,464 (3)     1984/97  
Centrelake Plaza
    1,570       12,764       14,334       2,225             1989  
Chicago Avenue Business Park
    1,223       4,618       5,841       647             1986  
Havengate Center
    1,913       8,405       10,318       1,440             1985  
HDS Plaza
    2,604       9,232       11,836       1,486             1987  
5702 Bolsa
    589       1,874       2,463       256       941 (3)     1987/97  
5672 Bolsa
    254       955       1,209       223       330 (3)     1987  
5632 Bolsa
    458       1,436       1,894       188       845 (3)     1987  
Huntington Commerce Center
    992       3,572       4,564       558       1,555 (3)     1987  
Savi Tech Center
    8,280       28,121       36,401       4,001       14,728 (3)     1989  
Yorba Linda Business Park
    2,629       8,912       11,541       1,337       4,170 (3)     1988  
Cymer Technology Center
    5,446       18,906       24,352       2,319       10,918 (3)     1986  
Poway Industrial
    1,876       5,840       7,716       773       3,492 (3)     1991/96  
10180 Scripps Ranch
    1,165       3,723       4,888       485       1,997 (3)     1978/96  
Via Frontera
    1,792       6,477       8,269       1,010       2,875 (3)     1982/97  
Westridge
    1,807       6,319       8,126       1,028       2,972 (3)     1984/96  

F-25


Table of Contents

                                                 
                            Basis        
            Initial Costs   Step Up        
           
 
       
                                            Costs Capitalized
    Square           Buildings and           Buildings and   Subsequent to
    Footage   Land   Improvements   Land   Improvements   Acquisition (2)
   
 
 
 
 
 
Tower Plaza Retail
    133,481       4,531       13,660                   1,438  
6060 Center Drive
    241,928       1,990             2,310             60,250  
Howard Hughes – Spectrum Club
    36,959       2,500       7,500                   36  
6080 Center Drive
    287,148       1,990             3,092             72,300  
Univision – 5999 Center Drive
    161,650                   1,529             42,266  
11075 Santa Monica
    35,696       1,225       3,746                   1,470  
Continental Grand Plaza
    235,926       7,125       40,451                   6,445  
Calabasas Tech
    273,526       11,513       34,591                   6,460  
Oceangate Tower
    210,907       3,080       20,386                   3,864  
Lyons Plaza
    61,203       2,078       6,267                   1,138  
Genesee Executive Plaza
    155,820       6,750       20,178                   3,578  
Solar Drive Business Center
    125,132       4,250       12,770                   1,278  
91 Freeway Center
    93,277       2,900       9,179                   1,614  
601 S. Glenoaks
    72,524       2,450       7,519                   914  
Tourney Pointe
    219,991       6,047       21,334                   11,650  
Hillside Corporate Center
    59,876       2,213       7,336                   2,129  
Westlake Gardens II
    48,874       1,832       5,493                   1,904  
Howard Hughes Tower
    313,833       5,830       47,170                   10,083  
2001 Wilshire Blvd
    101,125       5,007       14,893                   815  
Carmel Valley Centre
    107,197       4,900       23,416                   29  
Carmel View Office Plaza
    77,460       3,100       9,377                   220  
Crossroads
    133,566       3,950       12,860                   37  
Governor Executive Center
    52,195       1,500       9,707                   46  
Gateway Towers
    432,894       5,585       57,128                   1,244  
 
    19,132,176     $ 483,079     $ 1,836,221     $ 8,540     $ 8,607     $ 708,761  
 
   
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                 
    Total Costs                                
   
                               
            Buildings and           Accumulated           Year Built/
    Land   Improvements   Total   Depreciation (1)   Encumbrances   Renovated
   
 
 
 
 
 
Tower Plaza Retail
    4,531       15,098       19,629       2,126             1970/97  
6060 Center Drive
    4,300       60,250       64,550       3,669             2000  
Howard Hughes – Spectrum Club
    2,500       7,536       10,036       865             1993  
6080 Center Drive
    5,082       72,300       77,382       2,217             2002  
Univision – 5999 Center Drive
    1,529       42,266       43,795       1,156             2001  
11075 Santa Monica
    1,225       5,216       6,441       1,021             1983  
Continental Grand Plaza
    7,125       46,896       54,021       7,644       27,179 (3)     1986  
Calabasas Tech
    11,513       41,051       52,564       6,256             1990/2001  
Oceangate Tower
    3,080       24,250       27,330       3,721             1971/93/94  
Lyons Plaza
    2,078       7,405       9,483       1,020             1990  
Genesee Executive Plaza
    6,750       23,756       30,506       3,413       16,623 (3)     1984  
Solar Drive Business Center
    4,250       14,048       18,298       1,854             1982  
91 Freeway Center
    2,900       10,793       13,693       1,747             1986/97  
601 S. Glenoaks
    2,450       8,433       10,883       1,048       5,784 (3)     1990  
Tourney Pointe
    6,047       32,984       39,031       3,515             1985/98/2000  
Hillside Corporate Center
    2,213       9,465       11,678       1,225             1998  
Westlake Gardens II
    1,832       7,397       9,229       1,119             1999  
Howard Hughes Tower
    5,830       57,253       63,083       7,121             1987  
2001 Wilshire Blvd
    5,007       15,708       20,715       1,511             1980  
Carmel Valley Centre
    4,900       23,445       28,345       168             1987/89  
Carmel View Office Plaza
    3,100       9,597       12,697       70             1985  
Crossroads
    3,950       12,897       16,847       92             1979  
Governor Executive Center
    1,500       9,753       11,253       71             1988  
Gateway Towers
    5,585       58,372       63,957       412             1984/86  
 
  $ 491,619     $ 2,553,589     $ 3,045,208     $ 392,611     $ 570,654          
 
   
     
     
     
     
         


(1)   The depreciable life for buildings and improvements ranges from ten to forty seven years. Tenant improvements and leasing costs are depreciated over the remaining term of the lease.
 
(2)   Amounts shown net of write-offs of fully depreciated assets and include total capitalized interest of $51.2 million.
 
(3)   All of these properties are collateral for our $552.3 million mortgage financings. The encumbrance allocated to an individual property is based on the related individual release price.

F-26


Table of Contents

ARDEN REALTY LIMITED PARTNERSHIP

15. Schedule of Commercial Properties and Accumulated Depreciation

     The changes in our investment in commercial properties and related accumulated depreciation for each of the periods in the three years ended December 31, are as follows ($000’s):

                           
      Arden Realty Limited Partnership
     
      For the Years Ended December 31
     
      2002   2001   2000
     
 
 
Commercial Properties:
                       
 
Balance at beginning of period
  $ 2,797,052     $ 2,741,681     $ 2,453,370  
 
Improvements
    95,073       78,580       159,163  
 
Disposition of property
    (24,094 )     (44,773 )     (10,078 )
 
Write offs of fully depreciated assets
    (24,129 )     (21,412 )     (13,723 )
 
Acquisition of properties
    134,938              
 
Transfers from (to) properties under development and land available for development
    66,368       42,976       152,949  
 
 
   
     
     
 
 
Balance at end of period
  $ 3,045,208     $ 2,797,052     $ 2,741,681  
 
 
   
     
     
 
Accumulated Depreciation:
                       
 
Balance at beginning of period
  $ (307,082 )   $ (231,499 )   $ (157,608 )
 
Depreciation for period
    (111,022 )     (100,789 )     (87,126 )
 
Disposition of property
    1,982       3,794       531  
 
Write offs of fully depreciated assets
    24,129       21,412       13,723  
 
Transfers to (from) properties under development and land available for development
    (618 )           (1,019 )
 
 
   
     
     
 
 
Balance at end of period
  $ (392,611 )   $ (307,082 )   $ (231,499 )
 
 
   
     
     
 

F-27