Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For fiscal year ended December 31, 2004

OR

For the transition period from                      to                     

Commission file Number 0-22741

CARRAMERICA REALTY, L.P.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (202) 729-1700

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

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

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

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

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

As of June 30, 2004, assuming that each unit of partnership interest has the same value as a share of common stock of CarrAmerica Realty Corporation (into which such units may be redeemed under certain circumstances) the aggregate market value of the 1,126,918 units of partnership interest held by non-affiliates of the registrant was approximately $34,066,731, based upon the closing price of a share of common stock of CarrAmerica Realty Corporation of $30.23 on the New York Stock Exchange composite tape on such date.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Portions of the Annual Report on Form 10-K of CarrAmerica Realty Corporation for the year ended December 31, 2004 are incorporated by reference into Parts I, II and III.

(2) Portions of the CarrAmerica Proxy Statement with respect to the Annual Stockholders’ Meeting to be held April 28, 2005 are incorporated by reference into Part III.

Table of Contents

PART I

General

CarrAmerica Realty, L.P. is a Delaware limited partnership formed in March 1996 for the purpose of owning, acquiring, developing and operating office buildings across the United States. As of December 31, 2004, we owned a controlling interest in a portfolio of 53 operating office buildings. The 53 operating office buildings contain a total of approximately 4.8 million square feet of net rentable area and as of December 31, 2004 were 87.8% leased. As of December 31, 2004, we also owned minority interests (ranging from 21.2% to 49.0%) in 30 operating office buildings. The 30 operating office buildings in which we owned a minority interest as of December 31, 2004 were 92.6% leased.

We are managed indirectly by CarrAmerica Realty Corporation, a fully integrated, self-administered and self-managed publicly traded real estate investment trust (“REIT”), which is listed on the New York Stock Exchange under the symbol “CRE.”

On June 30, 2004, CarrAmerica Realty Corporation contributed substantially all of it assets to CarrAmerica Realty Operating Partnership, L.P. in exchange for units of common and preferred partnership interest in CarrAmerica Realty Operating Partnership, L.P. CarrAmerica Realty Operating Partnership, L.P. assumed substantially all of CarrAmerica Realty Corporation’s liabilities (CarrAmerica Realty Corporation and CarrAmerica Realty Operating Partnership, L.P. are collectively referred to hereafter as “CarrAmerica”). Our general partner is CarrAmerica Realty GP Holdings, LLC. (the “General Partner”), a wholly owned subsidiary of CarrAmerica. Our General Partner owned a 1.0% interest in us at December 31, 2004. Our limited partners are CarrAmerica Realty LP Holdings, LLC a wholly owned subsidiary of CarrAmerica, which owned an approximate 91.2% interest in us at December 31, 2004, and various other individuals and entities, which collectively owned an approximate 7.8% interest in us at December 31, 2004.

CarrAmerica focuses on the acquisition, development, ownership and operation of office properties, located primarily in selected markets across the United States. As of December 31, 2004, it owned a controlling interest in 251 operating office buildings. The 251 operating office buildings contain a total of approximately 19.9 million square feet of net rentable area. The stabilized operating buildings (those in operation greater than one year) in which it owned a controlling interest as of December 31, 2004 were 88.2% leased. These properties had approximately 1,027 tenants. As of December 31, 2004, CarrAmerica also owned minority interests (ranging from 15% to 50%) in 41 operating office buildings and one building under construction. The 41 operating office buildings contain a total of approximately 6.5 million square feet of net rentable area. The one office building under construction will contain approximately 124,000 square feet of net rentable area. The stabilized operating buildings in which CarrAmerica owned a minority interest as of December 31, 2004 were 88.0% leased. For more complete information regarding CarrAmerica, see CarrAmerica’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 CarrAmerica 10-K”).

CarrAmerica or its predecessor, The Oliver Carr Company (“OCCO”), have developed, owned and operated office buildings in the Washington, D.C. metropolitan area for more than 40 years.

CarrAmerica organized and administers us as a means of acquiring, developing, owning and operating certain properties in its portfolio. All of our properties, along with our financial condition and results of operations, are reported as part of the consolidated financial statements of CarrAmerica. We are required to report separately in this Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission because we are a guarantor of the CarrAmerica’s publicly held debt. As of December 31, 2004, approximately 22.7% of the total assets of CarrAmerica were owned by us or our subsidiaries.

Effective January 1, 2004, all of our employees were transferred to and became employees of CarrAmerica. We contract with CarrAmerica for their services. During 2004, CarrAmerica charged us for the compensation costs of approximately 57 on-site employees. The compensation cost charged to us by

2

Table of Contents

CarrAmerica is equivalent to the cost we would have incurred if we were their employer. The compensation cost is charged separately from the general and administrative cost allocation made to us by CarrAmerica.

Business Strategy

Our primary business is real estate property operations. We are an integral part of CarrAmerica, and our operations and strategic direction are defined by CarrAmerica. CarrAmerica’s primary business objectives are to achieve long-term sustainable per share earnings and cash flow growth and to maximize stockholder value by acquiring, developing, owning and operating office properties primarily in markets throughout the United States that exhibit strong, long-term growth characteristics. CarrAmerica believes that it utilizes its knowledge of its markets to evaluate market conditions and determine whether those conditions favor acquisition, development or disposition of assets. During the last five years, CarrAmerica has actively deployed capital towards acquisitions and development in order to create a portfolio with strong long-term growth prospects. In addition to seeking growth through acquisitions and development, CarrAmerica continues to strive to retain tenants and attract new tenants in its existing portfolio. CarrAmerica believes that its focus on its local relationships in its core markets, on customer service, primarily through superior property management, and fast and responsive leasing initiatives has enabled it to maintain strong portfolio performance in a challenging office market.

Each of CarrAmerica’s markets is managed by a Marketing Managing Director (“MMD”), who is responsible for maximizing returns on CarrAmerica’s portfolio and pursuing investment, development, and service opportunities. MMDs ensure that CarrAmerica consistently meets the needs of its customers, identifying new growth or capital deployment opportunities and sustaining active relationships with real estate brokers. Because of their ties and experience in the local markets, MMDs have extensive knowledge of local conditions in their respective markets and are invaluable in building CarrAmerica’s local operations and investment strategies.

Our property operating income by market for the year ended December 31, 2004 was as follows:

3

Table of Contents

2004 Activity

As a result of the weak economic climate over the last several years, the office real estate markets were materially affected. The contraction of office workforces reduced demand for office space and overall vacancy rates for office properties increased in all of our markets through 2002 and our operations were adversely impacted. In 2003, vacancy rates appeared to peak in many of our markets and some positive net absorption of space started to occur. In 2004, the positive trend of reduced vacancy rates and positive net absorption continued in most of our markets. As a result of improved job growth, leasing activity is up significantly, and we believe that market rental rates have stabilized in all of our markets and are beginning to improve in some of our markets including Washington, D.C and Southern California. Rental economics are expected to improve in most of our markets by the end of 2005.

The occupancy in our portfolio of stabilized operating properties was 87.8% at December 31, 2004 compared to 87.8% at December 31, 2003 and 90.4% at December 31, 2002. Due to the improving market conditions described above and the elimination of most of our poor credit quality tenants through lease defaults and terminations in the last few years, we believe that our average occupancy in most markets stabilized in the second half of 2004. If demand continues to improve in 2005, we expect that our overall portfolio average occupancy may improve.

While market rental rates have stabilized in our markets, rental rates on in-place leases in certain markets remain significantly above current market rental rates. We estimate that market rental rates on leased space expiring in 2005 will be, on average, approximately 12%-16% lower than straight-lined rents on our expiring leases. We have 350,000 square feet of space on which leases are currently scheduled to expire in 2005.

Disposition Activity

During 2004 we did not acquire any real estate properties. We disposed of our Tower of the Hills property, resulting in proceeds of approximately $10.5 million and recognized a gain of $0.1 million. We recognized an impairment loss of $3.0 million on this property in the fourth quarter of 2003. We have no continuing involvement with the Tower of the Hills property after the sale and accordingly, the gain on this sale, the impairment loss and the operating results of this property are classified as discontinued operations. Tower of the Hills was subject to a contract for sale at December 31, 2003 and met our criteria for the property and related assets to be classified as held for sale at that date.

Joint Ventures and Development Activities

Joint venture arrangements provide us with opportunities to reduce investment risk by diversifying capital deployment and enhancing returns on invested capital from fee arrangements. We did not enter any new joint ventures or have any development activity during 2004.

4

Table of Contents

Forward-Looking Statements

Statements contained in this Form 10-K which are not historical facts may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Such statements (none of which are intended as a guarantee of performance) are subject to certain risks and uncertainties, which could cause our actual future results, achievements or transactions to differ materially from those projected or anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-K is filed with the SEC. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among others:

Risk Factors

For a discussion of risks associated with an investment in CarrAmerica and us, see “Item 1 – Business – The Company – Risk Factors” in the 2004 CarrAmerica 10-K, which information is hereby incorporated by reference.

5

Table of Contents

General

As of December 31, 2004, we owned interests (consisting of whole or partial ownership interests) in 83 operating office buildings located in 11 markets across the United States. As of December 31, 2004, we owned fee simple title or leasehold interests in 53 operating office buildings and non-controlling partial interests of 21.2% to 49.0% in 30 operating office buildings. The 53 operating office buildings contain a total of approximately 4.8 million square feet of net rentable area and as of December 31, 2004 were 87.8% leased. The 30 operating office buildings in which we owned a minority interest as of December 31, 2004 contain approximately 3.3 million square feet of net rentable area and were 92.6% leased as of December 31, 2004.

6

Table of Contents

The following table sets forth information about each operating property in which we own an interest as of December 31, 2004:

7

Table of Contents

8

Table of Contents

Insurance

Although we believe our properties are adequately covered by insurance, we cannot predict at this time if we will be able to obtain appropriate coverage at a reasonable cost in the future. Our insurance costs have fluctuated significantly in recent years, increasing significantly in mid-2002, while decreasing in connection with our 2004-2005 renewal.

In 2002, the Terrorism Risk Insurance Act of 2002 (“TRIA”), was enacted and mandated that insurance carriers offer insurance covering physical damage from terrorist incidents certified by the United States government as foreign terrorist acts. Under TRIA, the United States government will reimburse insurance carriers, subject to certain deductibles, for up to 90% of any claims from such certified terrorist acts, subject to an overall cap. TRIA permits insurance carriers to exclude losses due to biological, chemical or radioactive contamination.

In May 2004, CarrAmerica formed a wholly-owned captive insurance company which provides $490 million in coverage against losses due solely to biological, chemical or radioactive contamination arising out of a certified terrorist act. In the event of a covered loss, we expect CarrAmerica’s captive insurance company to recover 90% of its losses, less certain deductibles, from the United States government, but it has not reinsured its remaining exposure and may have insufficient capital to fully pay CarrAmerica’s and our claim.

In 2003, due to the rising cost of California earthquake insurance, CarrAmerica reviewed our probable maximum loss (“PML”) and industry practice related to earthquake coverage for various factors. As a result of this review, CarrAmerica determined that it was possible to lower our earthquake coverage from $200 million to $150 million. We believe this will be sufficient coverage but there can be no assurance that such coverage will adequately compensate us for any loss, that our coverage would continue after a loss, or that a loss, even if covered, would not have a material adverse effect on our business, financial condition or results of operations.

Occupancy, Average Rentals and Lease Expirations

As of December 31, 2004, 87.8% of our aggregate net rentable square footage in 53 consolidated operating office buildings was leased. The following table summarizes percent leased and average annualized rent per leased square foot (excluding storage space) for the past three years for the consolidated operating properties:

9

Table of Contents

The following table is a schedule of our lease expirations for leases in place as of December 31, 2004 for the 53 consolidated operating office buildings, assuming no tenants exercise renewal options:

Mortgage Financing

As of December 31, 2004, two of our consolidated operating properties were subject to fixed rate mortgage indebtedness. The total of these mortgages was $32.2 million. Our fixed rate mortgage debt as of December 31, 2004, bore an effective weighted average interest rate of 6.91% and had a weighted average maturity of 4.2 years. The following table details information regarding the existing mortgage indebtedness for the consolidated operating properties as of December 31, 2004. We repaid $40.3 million of fixed rate debt in 2004, of which $29.8 million was extinguished early. In connection with these extinguishments, we borrowed $19.5 million under a variable rate note from CarrAmerica and incurred prepayment penalties of $0.8 million which are included in interest expense.

For additional information regarding our properties and our operations, see “Item 1. Business.”

10

Table of Contents

We are party to a variety of legal proceedings arising in the ordinary course of business. All of these matters, taken together, are not expected to have a material adverse impact on us. Based on currently available facts, we believe that the disposition of matters that are pending or asserted will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

None.

PART II

There is no established public trading market for our Units. As of December 31, 2004, there were 25 holders of Units on record. As of December 31, 2004, there were no options or warrants to purchase Units outstanding. In addition, as of December 31, 2004, there were no Units that were being, or have been, proposed to be publicly offered by us.

Each Unit held by partners other than GP Holdings or LP Holdings is (subject to holding period limitations) redeemable for cash equal to the value of a share of CarrAmerica common stock or, at the option of GP Holdings, CarrAmerica common stock on a one-for-one basis. For the high and low trading prices of CarrAmerica’s common stock for the last two years, see “Item 5 – Market for Registrant’s Common Equity and Related Stockholder Matters” in the 2004 CarrAmerica 10-K, which information is hereby incorporated by reference.

Under our partnership agreement, to the extent that there is available cash, each Class A Unit, Class D Unit, and Class E Unit is entitled to receive a distribution equal to the amount of dividend per common share that is paid to CarrAmerica’s shareholders. Once all of the holders of these units have received their distribution, all additional available cash may be distributed to the holders of Class B Units. We have made regular quarterly distributions of $0.50 per Class A, D and E Unit throughout 2004 and 2003. The distributions are appropriately prorated to reflect ownership of Units for less than the full period to which the distribution relates. Our ability to make distributions depends on a number of factors, including net cash provided by operating activities, capital commitments and debt repayment schedules. Holders of Units are entitled to receive distributions when, as and if declared by the Board of Directors of CarrAmerica, out of any funds legally available for that purpose.

Cash flows from operations are an important factor in our ability to sustain our quarterly distributions to our partners at the current rate $0.50 per unit per quarter. Cash flows from operations increased slightly from $43.4 million in 2003 to $46.9 million in 2004. We expect our cash flow from operations to be lower in 2005 than 2004 and tenant improvements are expected to remain at elevated levels as a result of factors mentioned in the introduction to CarrAmerica’s Management’s Discussion and Analysis, including but not limited to, continued declines in rental rates compared to the rates on expiring leases. We expect that these factors will negatively impact our cash flows from operations. We currently expect to maintain our distribution rate of $0.50 per unit per quarter in 2005. We expect that operating cash flow will be sufficient to maintain these distributions. In the event available cash is insufficient to pay distributions at the current level we may be unable to make distributions to our Class B Unitholders.

11

Table of Contents

The following table sets forth selected financial and operating information for us and our consolidated subsidiaries as of and for the years ended December 31, 2004, 2003, 2002, 2001, and 2000.

The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

The discussion that follows is based primarily on our consolidated financial statements as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002 and should be read along with the consolidated financial statements and related notes. The ability to compare one period to another may be significantly affected by acquisitions completed, development properties placed in service and dispositions made during those years. The number of operating office buildings that we owned and were consolidated in the financial statements was 53 as of December 31, 2004 and 55 as of December 31, 2003 and 2002.

As a result of the weak economic climate over the last several years, the office real estate markets were materially affected. The contraction of office workforces reduced demand for office space and overall vacancy rates for office properties increased in all of our markets through 2002 and our operations were adversely impacted. In 2003, vacancy rates appeared to peak in many of our markets and some positive net absorption of space started to occur. In 2004, the positive trend of reduced vacancy rates and positive net absorption continued in most of our markets. As a result of improved job growth, leasing activity is up significantly, and we believe that market rental rates have stabilized in all of our markets and are beginning to improve in some of our markets. Rental economics are expected to improve in most of our markets by the end of 2005. The occupancy in our portfolio of stabilized operating properties was 87.8% at December 31, 2004 and 2003 and 90.4% at December 31, 2002. Due to the improving market conditions described above and the elimination of most of our poor credit quality tenants through lease defaults and terminations we believe that our average occupancy in all markets stabilized. If demand continues to improve in 2005, we expect that our overall portfolio average occupancy may improve further.

12

Table of Contents

While market rental rates have stabilized in our markets, rental rates on in-place leases in certain markets remain significantly above current market rental rates. We estimate that market rental rates on leased space expiring in 2005 will be, on average, approximately 12%-16% lower than straight-lined rents on expiring leases. We have approximately 350,000 square feet of space on which leases are currently scheduled to expire in 2005.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments. Our critical accounting policies and estimates relate to estimating the depreciable lives of assets, evaluating the impairment of long-lived assets and investments, allocating the purchase cost of acquired properties, and evaluating the collectibility of accounts receivable

Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets by class are as follows:

We make subjective assessments as to the useful lives of our assets. These assessments have a direct impact on our net income. Should we lengthen the expected useful life of an asset, it would be depreciated over a longer period, resulting in less depreciation expense and higher annual net income. Should we shorten the expected useful life of an asset, it would be depreciated over a shorter period, resulting in more depreciation expense and lower annual net income.

We assess the carrying values of our assets on a regular basis. If events or changes in circumstances indicate that the carrying value of a rental property to be held and used, land held for development or lease intangibles may be impaired, we perform a recoverability analysis based on estimated undiscounted cash flows to be generated from the property or tenant, as applicable, in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property and related assets, such as tenant improvements and lease commissions, or lease intangibles are written down to estimated fair value and an impairment loss is recognized. If we decide to sell rental properties or land holdings, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized. Our estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of additional impairment losses which, under applicable accounting guidance, could be substantial.

We allocate the purchase cost of acquired properties to the related physical assets and in-place leases based on their fair values. The fair values of acquired office buildings are determined on an “if-vacant” basis considering a variety of factors, including the physical condition and quality of the buildings, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions. The “if-vacant” fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on property tax assessments and other relevant information obtained in connection with the acquisition of the property.

The fair value of in-place leases includes the effect of leases with above or below market rents, where applicable, customer relationship value and the cost of acquiring existing tenants at the date of acquisition. Above market and below market in-place lease values are determined on a lease by lease basis

13

Table of Contents

based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid under the lease and (b) our estimate of the fair market lease rate for the corresponding space over the remaining non-cancellable terms of the related leases. The capitalized below market lease values are amortized as an increase to rental revenue over the initial term and any below market renewal periods of the related leases. Capitalized above market lease values are amortized as a decrease to rental revenue over the initial term of the related leases. Customer relationship values are determined based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics we consider include the nature and extent of our existing business relationships with the tenant, prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of customer relationship intangibles is amortized to expense over the lesser of the initial lease term and any expected renewal periods or the remaining useful life of the building. We determine the fair value of the cost of acquiring existing tenants by estimating the lease commissions avoided by having in-place tenants and avoided lost operating income for the estimated period required to lease the space occupied by existing tenants at the acquisition date. The cost of acquiring existing tenants is amortized to expense over the initial term of the respective leases. Should a tenant terminate its lease early, the unamortized portion of the in-place lease value is charged to expense. Changes in the assumptions used in the allocation of the purchase cost among the acquired assets would affect the timing of recognition of the related revenue and expenses.

Our allowance for doubtful accounts receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivable, the payment history of the tenant or other debtor, the amount of security we hold, the financial condition of the tenant and our assessment of its ability to meet its lease obligations, the basis for any disputes and the status of related negotiations, etc. Our estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on our tenants, particularly in our largest markets. Bad debt expense was $0.6 million, $0.7 million, and $1.2 million for 2004, 2003, and 2002 respectively. The decreases in bad debts expense in 2004 and 2003 were due primarily to the reduction of delinquent tenants as marginal tenants’ leases were terminated or sublet.

Results of Operations

Operating results are summarized as follows:

During 2002, we acquired three operating properties (11119 Torrey Pines, Canal Center and TransPotomac V Plaza). These acquisitions affect the comparisons of our operating results, particularly for

14

Table of Contents

the years ended December 31, 2003 and 2002. Operating results of the properties acquired in 2002 are summarized as follows:

Operating revenues decreased $8.0 million (7.7%) in 2004 as compared to 2003 and increased $9.7 million (10.3%) in 2003 as compared to 2002. Revenues in 2004 decreased primarily due to decreases in minimum base rents ($4.5 million), recoveries from tenants ($2.7 million), and other tenant charges ($0.5 million). These decreases are due primarily to lower occupancy rates during the first three quarters of 2004 and lower rental rates for new and renewing tenants during 2004. Minimum base rents increased ($9.9 million) in 2003 as compared to 2002 due primarily to the operating properties acquired during 2002 ($12.0 million), partially offset by declines in occupancy ($2.7 million).

Property operating expenses decreased $0.9 million (2.5%) in 2004 as compared to 2003 and increased $3.3 million (10.0%) in 2003 as compared to 2002. The decrease in 2004 is due primarily to lower insurance costs ($0.5 million) and bad debt expense ($0.1). The increase in 2003 as compared to 2002 relates primarily to the three properties acquired during 2002 ($3.3 million).

General and administrative expenses decreased $0.3 million (3.3%) in 2004 as compared to 2003 and increased $4.9 million (114.0%) during 2003 as compared to 2002. The decrease in 2004 was due primarily to decreased allocations of expense from CarrAmerica ($0.3 million). The increase in 2003 was primarily a result of increased allocations ($5.6 million) of expense from CarrAmerica partially offset by decreased legal expenses ($0.5 million). During 2003, CarrAmerica revised and refined its general and administrative cost accounting procedures to allocate certain costs on a specific identification basis and to allocate general costs to subsidiaries based on their respective assets. In prior periods, allocations of these expenses were based primarily on full time equivalent employees. The change in allocation methodology resulted in an increase in expenses allocated to us in 2003 as compared with 2002. Management believes the allocation method being used is reasonable.

Depreciation and amortization expense increased $0.2 million (0.6%) in 2004 as compared to 2003 and $5.5 million (20.8%) in 2003 as compared to 2002. The increase in 2004 was due primarily to increased depreciation of tenant improvements ($0.2 million). The increase in 2003 was a result of the acquisitions of properties during 2002 ($4.4 million).

Interest expense decreased $0.3 million (3.1%) in 2004 as compared to 2003 and $4.8 million (32.9%) in 2003 as compared to 2002. The decrease in 2004 was due primarily to the effects of a decrease in outstanding debt ($0.9 million) partially offset by increases in rates ($0.6 million). During 2004 our mortgages and notes payable balance decreased $20.8 million as a result of repayments of mortgages payable ($39.6 million), partially offset by increased borrowings from affiliates ($18.8 million). The decrease in 2003 was due primarily to lower interest on loans from affiliates ($2.7 million) due primarily to lower working capital borrowings. In addition, interest for 2002 included $0.7 million related to $63.5 million of mortgages assumed in connection with property acquisitions that were repaid in the fourth quarter of 2002.

Other income decreased $0.4 million (12.9%) in 2004 as compared to 2003 and $0.8 million (20.5%) in 2003 as compared to 2002. The decrease in 2004 was due primarily to a decrease in interest income ($0.4 million). The decrease in 2003 was due primarily to a decrease in equity in earnings of unconsolidated entities ($0.9 million) primarily as a result of increased vacancies in properties owned by these entities.

15

Table of Contents

We dispose of assets (sometimes using tax-deferred exchanges) that are inconsistent with our long-term strategic or return objectives or where market conditions for sale are favorable. The proceeds from the sales are redeployed into other properties or to support other needs.

During 2004, we disposed of our Tower of the Hills property. We recognized an impairment loss of $3.0 million on this property in the fourth quarter of 2003. We have no continuing involvement with the Tower of the Hills property after the sale and accordingly, the gain on this sale, the impairment loss and the operating results of this property are classified as discontinued operations.

During 2003 we did not dispose of any operating properties, although we reduced a previously recognized gain $0.4 million for additional costs related to a sold property. During 2002, we sold two properties (Wasatch 17 and Commons at Las Colinas) for approximately $129.4 million recognizing a gain of $22.4 million. We also recognized impairment losses of $1.0 million on two parcels of land.

Discontinued operations - net operations of properties sold or held for sale decreased $1.0 million in 2004 as compared to 2003 and $4.3 million in 2003 as compared to 2002. The decrease in 2004 was due primarily to the sale of our Tower of the Hills property in the first quarter of 2004. The decrease in 2003 was due primarily to the sale of Commons at Las Colinas in August 2002. The Commons at Las Colinas was a significantly larger property than Tower of the Hills.

Net operations of properties classified as discontinued operations are summarized as follows:

Consolidated Cash Flows

Consolidated cash flow information is summarized as follows:

Operations provided net cash of $46.9 million in 2004 as compared to $43.4 million in 2003 and $49.2 million in 2002. The changes in cash flow from operating activities were primarily the result of factors discussed above in the analysis of operating results. The level of net cash provided by operating activities is also affected by the timing of receipt of revenues and payment of expenses.

Our investing activities provided net cash of $2.1 million in 2004, used net cash of $8.3 million in 2003, and provided net cash of $25.5 million in 2002. The change in cash flows from investing activities in 2004 as compared to 2003 was due primarily to increased proceeds from dispositions of properties ($10.5 million) and reduced costs of acquisition and development of rental property ($3.3 million), partially offset by a decrease in distributions from unconsolidated entities ($3.6 million). The change in cash flows from investing activities in 2003 as compared to 2002 was due primarily to decreased proceeds from dispositions of properties ($129.4 million), partially offset by decreased acquisition and development of rental properties ($95.6 million).

16

Table of Contents

Financing activities used net cash of $48.9 million, $36.7 million, and $74.3 million in 2004, 2003, and 2002, respectively. The increase in net cash used in financing activities in 2004 as compared to 2003 was due primarily due to increased distributions on mandatorily redeemable partnership units ($8.2 million) due primarily to the distributions of available cash to Class B Unitholders (affiliates of CarrAmerica) pursuant to our partnership agreement and net repayments on debt and amounts due to affiliates ($4.1 million). The decrease in cash used in financing activities in 2003 as compared to 2002 was due primarily to lower repayments on mortgages and notes payable ($73.2 million), partially offset by increased net repayments of advances from affiliates ($35.4 million).

Liquidity and Capital Resources

Our liquidity and capital resources are dependent upon CarrAmerica and its other affiliates. CarrAmerica’s primary sources of capital are real estate operations and its unsecured credit facility. On June 30, 2004, CarrAmerica entered into a new $500.0 million, three-year unsecured revolving credit facility with JPMorgan Chase Bank as administrative agent for a syndicate of banks. The facility replaced and was used to repay all amounts outstanding under CarrAmerica’s previous unsecured senior credit facility. CarrAmerica may increase the facility to $700.0 million by request at any time within 24 months of the closing, provided the funding commitments are increased accordingly. The facility can be extended one year at CarrAmerica’s option. The facility carries an interest rate of 65 basis points over 30-day LIBOR, or 3.05% as of December 31, 2004. As of December 31, 2004, $295.0 million was drawn on the credit facility, $35.9 million in letters of credit were outstanding, and CarrAmerica had $169.1 million available for borrowing. We and CarrAmerica derive substantially all of our revenue from tenants under leases at our properties. Our operating cash flow therefore depends materially on the rents that we are able to charge to our tenants, and the ability of these tenants to make their rental payments.

Our primary uses of cash are to fund distributions to Unitholders, to fund capital investments in our existing portfolio of operating assets, and to fund new acquisitions and our development activities. We regularly require capital to invest in our existing portfolio of operating assets in connection with large-scale renovations, routine capital improvements, deferred maintenance on properties we have recently acquired, and our leasing activities, including funding tenant improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures can vary significantly depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases.

During 2005, we expect that we will have significant capital requirements, including the following items. There can be no assurances that our capital requirements will not be materially higher or lower than these expectations.

We expect to meet our capital requirements using cash generated by our real estate operations.

We believe that we will generate sufficient cash flow from operations and have access to the capital resources necessary to expand and develop our business, to fund our operating and administrative expenses, to continue to meet our debt service obligations, to pay distributions to Unitholders, to acquire additional properties and land, and to pay for construction in progress. However, as a result of general economic downturns, if CarrAmerica’s credit rating is downgraded, if rental rates on new leases are significantly lower than expiring leases or if our properties do not otherwise perform as expected, we may not generate sufficient cash flow from operations or otherwise have access to capital on favorable terms, or at all. If we cannot raise the expected funds from the sale of properties and/or if we are unable to obtain capital from other sources, we may not be able make required principal and interest payments, make strategic acquisitions or make necessary routine capital improvements with respect to our existing portfolio of operating assets. Any of these events could have a material adverse effect on our liquidity, financial

17

Table of Contents

condition, results of operations and the value of our securities. In addition, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the holder of the mortgage could foreclose on the property, resulting in loss of income and asset value. An unsecured lender could also attempt to foreclose on some of our assets in order to receive payment. In most cases, very little of the principal amount that we borrow is repaid prior to the maturity of the loan. We may refinance that debt when it matures, or we may pay off the loan. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing (such as possible reluctance of lenders to make commercial real estate loans) may result in higher interest rates and increased interest expense.

Under the our partnership agreement to the extent that there is available cash, each Class A Unit, Class D Unit, and Class E Unit is entitled to receive a distribution equal to the amount of dividend per common share that is paid to CarrAmerica’s shareholders. Once all of the holders of these units have received their distribution, all additional available cash may be distributed to the holders of Class B Units. Cash flows from operations are an important factor in our ability to sustain our quarterly distributions to our partners at the current rate of $0.50 per unit per quarter. Cash flows from operations increased slightly from $43.4 million in 2003 to $46.9 million in 2004. We expect our cash flow from operations to be lower in 2005 than 2004 and tenant improvements are expected to remain at elevated levels as a result of factors mentioned in the introduction to CarrAmerica’s Management’s Discussion and Analysis, including but not limited to, continued declines in rental rates compared to the rates on expiring leases. We expect that these factors will negatively impact our cash flows from operations. We currently expect to maintain our distribution rate of $0.50 per unit per quarter in 2005. We expect that operating cash flow will be sufficient to maintain these distributions. In the event available cash is insufficient to pay distributions at the current level we may be unable to make distributions to our Class B Unitholders.

CarrAmerica’s unsecured credit facility contains financial and other covenants with which it must comply. Some of these covenants include:

As of December 31, 2004, CarrAmerica was in compliance with all of its debt covenants, however, its ability to draw on the unsecured credit facility or incur other unsecured debt in the future could be restricted by the loan covenants. CarrAmerica’s maximum ratio of total debt to tangible fair market value of its assets cannot exceed 60% (55% prior to a modification on March 1, 2005). As of December 31, 2004, CarrAmerica’s total debt to tangible fair market value was 53.2%. CarrAmerica anticipates reducing its total debt ratio by paying down outstanding unsecured debt obligations using the proceeds from property dispositions expected to close in 2005. As a result, CarrAmerica does not expect to have any limitation on its ability to borrow under its line of credit during 2005.

Our total debt at December 31, 2004 is summarized as follows:

18

Table of Contents

Our fixed rate debt bore an effective weighted average interest rate of 7.77% at December 31, 2004 and had a weighted average maturity of 4.7 years. The effective weighted average interest rate of our fixed rate debt, excluding our notes payable to affiliates, was 6.91% at December 31, 2004 and had a weighted average maturity of 4.2 years. Our variable rate note payable to affiliate at December 31, 2004 bore an interest rate of 100 basis points over 30-day LIBOR or 3.4% as of December 31, 2004. We repaid $40.3 million of fixed rate debt in 2004, of which $29.8 million was early extinguished. In connection with these extinguishments, we borrowed $19.5 million under a variable rate note from CarrAmerica and incurred prepayment penalties of $0.8 million which are included in interest expense.

During the third quarter of 2004, we transferred a note receivable of $7.4 million from CarrAmerica Development, Inc. to CarrAmerica as payment for amounts due to CarrAmerica. This transfer resulted in a decrease in notes receivable and due to affiliates. Additionally, due to affiliates decreased as a result of repayments consistent with cash flows generated during 2004.

During 2004 we made distributions of $10.6 million of which $8.4 million were to CarrAmerica. Under our partnership agreement, to the extent that there is available cash, each Class A Unit, Class D Unit, and Class E Unit is entitled to receive a distribution equal to the amount of dividend per CarrAmerica share that is paid to its shareholders. Pursuant to the partnership agreement, subsequent to distributions to Class A, Class D, and Class E Unitholders, we determined that cash was available to distribute to Class B Unitholders. CarrAmerica is the only holder of Class B Units.

Capital Commitments

We regularly incur expenditures in connection with the re-leasing of office space, principally in the form of tenant improvements and leasing commissions. The amounts of these expenditures can vary significantly, depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases. We expect to pay for these capital expenditures out of cash from operations or, to the extent necessary, borrowings from CarrAmerica. We believe that these expenditures are generally recouped in the form of continuing lease payments.

Below is a summary of certain obligations that will require significant capital:

We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. We are currently committed to fund tenant-related capital improvements as described in the table above for executed leases. However, expected leasing levels could require additional tenant-related capital improvements which are not currently committed. Due to the competitive office leasing market and higher vacancy rates, we expect that tenant-related capital costs will continue to remain high into 2005.

Unconsolidated Investments and Joint Ventures

We have investments in real estate joint ventures in which we hold 21.2% to 49.0% interests. These investments are accounted for using the equity method and therefore the assets and liabilities of the joint ventures are not included in our financial statements. These joint ventures own and operate office buildings financed by non-recourse debt obligations that are secured only by the real estate and other assets of the joint ventures. We have no obligation to repay these non-recourse debt obligations and the lenders have no recourse to our other assets.

19

Table of Contents

Our investments in these joint ventures are subject to risks not inherent in our majority owned properties, including:

We do not have any off-balance sheet arrangements, other than those disclosed in our contractual obligations or as a guarantee, with any unconsolidated investments or joint ventures that have or are reasonably likely to have a future material effect on our financial condition, changes in our financial condition, our revenue or expenses, our results of operations, our liquidity, our capital expenditures or our capital resources.

Guarantee Obligations

We have unconditionally guaranteed unsecured notes issued by CarrAmerica to institutional and other investors. The aggregate principal amount of the unsecured notes was $1.4 billion and $1.1 billion as of December 31, 2004 and 2003, respectively. These notes are in the following form:

CarrAmerica’s senior unsecured notes contain various covenants with which CarrAmerica must comply. The covenants include:

As of December 31, 2004, CarrAmerica was in compliance with all of its unsecured note covenants.

$150.0 million of senior unsecured notes matured on July 1, 2004 and were repaid on that date using borrowings from CarrAmerica’s unsecured credit facility.

20

Table of Contents

$100 million of 6.625% senior unsecured notes are maturing March 2005. CarrAmerica expects to pay the notes at or before the scheduled maturity date from amounts drawn on its line of credit or the proceeds of property dispositions. We expect we will be a guarantor on any new financing CarrAmerica may undertake.

New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This Interpretation addresses the consolidation of variable interest entities (“VIEs”) in which the equity investor lacks one or more of the essential characteristics of a controlling financial interest or where the equity investment at risk is not sufficient for the entity to finance activities without subordinated financial support from other parties. The adoption of Interpretation No. 46 in 2003 had no effect on our financial statements as we concluded that we have no VIEs and are not required to consolidate any of our unconsolidated real estate ventures that we have accounted for using the equity method. In December 2003, the FASB issued a revised Interpretation No. 46 which modified and clarified various aspects of the original Interpretation. The adoption of the revised Interpretation No. 46 also had no effect on our financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). In particular, it requires that mandatorily redeemable financial instruments be classified as liabilities and reported at fair value and that changes in their fair values be reported as interest cost. SFAS No. 150 was effective for us as of July 1, 2003 and adoption did not affect our financial statements.

In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Compensation.” It replaces SFAS No. 123, “Accounting for Stock Issued to Employees.” SFAS No. 123 (R) requires the compensation cost relating to share-based payment transaction be recognized in financial statements. It is required to be applied for reporting periods beginning after June 15, 2005. CarrAmerica intends to adopt SFAS No. 123 (R) using the modified prospective application method which requires, among other things, that it recognize compensation costs for all awards outstanding at July 1, 2005, for which the requisite service has not yet been rendered. Because CarrAmerica has used a fair value based method of accounting for stock based compensation costs for all employee stock compensation awards granted, modified or settled since January 1, 2003, and does not expect to have significant unvested awards from periods prior to January 1, 2003 outstanding at July 1, 2005, adoption of SFAS No. 123 (R) is not expected to have a material effect on compensation costs allocated to us by CarrAmerica.

In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured on the fair value of assets exchanged. The statement eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.

Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevailing market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. We manage our risk by matching projected cash inflows from operating activities, financing activities and investing activities with projected cash outflows to fund debt payments, acquisitions, capital expenditures, distributions and other cash requirements.

Increases in interest rates would increase our interest expense and adversely affect our cash flow. As of December 31, 2004, we had $96.8 million in total debt outstanding including $32.2 million in

21

Table of Contents

mortgages, $37.6 million in fixed rate debt to CarrAmerica and $27.0 million of variable rate debt to CarrAmerica. The mortgage loans mature in 2009 and have weighted average interest rate of 6.91%. There are three notes to CarrAmerica. The first note for $30.0 million (balance at December 31, 2004 of $25.6 million), bears interest at 8.5% and requires monthly principal and interest payments of $242,000 and matures on May 31, 2011. The second is a $12.0 million loan that bears interest at 8.5% and requires monthly interest only payments of $85,000 and matures on March 27, 2007. The third note requires interest only payments equal to 100 basis points over 30-day LIBOR or 3.4% as of December 31, 2004. The outstanding loan balance as of December 31, 2004 was $27.0 million and matures on December 31, 2017. The outstanding balance of these notes payable was $64.6 million and $45.8 million at December 31, 2004 and 2003, respectively.

A change in interest rates generally does not impact future earnings and cash flows for fixed rate debt instruments. As fixed rate debt matures, and additional debt is incurred to fund the repayments of maturing loans, future earnings and cash flows may be impacted by changes in interest rates. This impact would be realized in the periods subsequent to debt maturities. The following is a summary of debt maturities at December 31, 2004:

If we assume the repayments of fixed rate borrowings are made in accordance with the terms and conditions of the respective credit arrangements, a 10 percent change in the market interest rate for the respective fixed rate debt instruments would change the fair market value of our fixed rate debt by approximately $1.7 million. The estimated fair market value of the fixed rate debt instruments at December 31, 2004 and 2003 was $77.6 million and $121.8 million, respectively. A 10 percent change in the market interest rate on our variable debt would not result in a material change in our interest expense.

The financial statements and supplementary data included in this Annual Report on Form 10-K are listed in Part IV, Item 15(a)(1).

None.

Evaluation was performed under the supervision of our management, including CarrAmerica’s Chief Executive Officer and Chief Financial Officer, of the effectiveness as of December 31, 2004 of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

None.

22

Table of Contents

PART III

We have no directors or executive officers. GP Holdings, our sole general partner, has no directors or executive officers and is managed by CarrAmerica through CarrAmerica Realty Operating Partnership, L. P., the sole member of GP Holdings.

The additional information required by this item concerning directors and executive officers of CarrAmerica is incorporated by reference to the information under the heading “Election of Directors (Proposal 1),” in CarrAmerica’s definitive proxy statement for the annual meeting of its stockholders to be held on April 28, 2005 (the “CarrAmerica Proxy Statement’) and under the headings “Item 1. Business-The Company-Our Directors” and “- Our Executive Officers and Certain Key Employees” in the 2004 CarrAmerica 10-K.

We have no directors or executive officers. GP Holdings, our sole general partner, has no directors or executive officers and is managed by CarrAmerica through CarrAmerica Realty Operating Partnership, L. P., the sole member of GP Holdings. The information required by this item with respect to CarrAmerica’s executive officers is incorporated by reference to the information in the CarrAmerica Proxy Statement under the heading “Executive Compensation”.

The following table sets forth information, as of February 19, 2005, regarding the beneficial ownership of Units by each person we know to be the beneficial owner of more than five percent of our outstanding Units. As of February 19, 2005, no director or executive officer of CarrAmerica beneficially owned any Units. Each entity named in the table has sole voting and investment power with respect to all Units shown as beneficially owned by that person, except as otherwise set forth in the notes to the table.

23

Table of Contents

CarrAmerica Realty Services, LLC (“CARS”), an indirect wholly owned subsidiary of CarrAmerica, provides management and leasing services to all of our office properties. During 2004 we incurred management fees of $2.3 million for CARS services.

This information is hereby incorporated by reference to the information under the heading “Independent Registered Public Accounting Firm” in the CarrAmerica Proxy Statement.

15(a)(1) Financial Statements

Reference is made to the Index to Financial Statements and Schedules on page 28.

15(a)(2) Financial Statement Schedules

Reference is made to the Index to Financial Statements and Schedules on page 28.

15(b) Exhibits

24

Table of Contents

25

Table of Contents