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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2004.

or

For the transition period from                      to                     

Commission file number 0-50854

Thomas Properties Group, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code

(213) 613-1900

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

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

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.  ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $176,999,996 based on the closing bid price on the Nasdaq for such shares on March 23, 2005.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement with respect to its 2005 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s fiscal year are incorporated by reference into Part III hereof as noted therein.

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THOMAS PROPERTIES GROUP, INC.

FORM 10-K

TABLE OF CONTENTS

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PART 1

ITEM 1. BUSINESS

General

The terms “Thomas Properties Group,” “we,” “us” and “our company” as used herein refer to Thomas Properties Group, Inc. We are a full-service real estate operating company that owns, acquires, develops and manages office, retail and multi-family properties on a nationwide basis. We are the successor company to Thomas Properties Group, LLC and its affiliates, referred to in this report as “TPGI Predecessor.” TPGI Predecessor was founded in late 1996 by our Chairman, President and Chief Executive Officer, Mr. James A. Thomas.

Mr. Thomas’ real estate experience dates back to 1976, when he entered the real estate business with Robert F. Maguire as a principal and as legal counsel. In 1983, their partnership arrangement was formalized as Maguire Thomas Partners. Messrs. Maguire and Thomas served as co-managers, and the firm quickly expanded into a national full-service real estate operating company. From 1976 to 1996, Maguire Thomas Partners and its predecessor entities acquired, developed, managed and/or owned interests in 17 properties with approximately 14 million rentable square feet of commercial space. In 1996, Maguire Thomas Partners split into two organizations, with several key members of Maguire Thomas Partners’ senior management joining Mr. Thomas at TPGI Predecessor. In the eight years since our founding, we have owned, acquired, or developed, for our own account or the account of third parties, properties in the West Coast and Mid-Atlantic regions of the United States with approximately 7.4 million rentable square feet of space, including the acquisition and restructuring of properties Mr. Thomas originally developed while at Maguire Thomas Partners.

We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering (the “Offering”), which consisted of the sale of 14,285,714 shares of common stock at $12.00 per share, resulting in net proceeds to our company of $151.9 million, after underwriting discounts and expenses of the Offering. Concurrent with the consummation of the Offering, our company and a newly formed limited partnership for which we serve as general partner and hold a 46.3% interest in, Thomas Properties Group, L.P. (the “Operating Partnership”), together with the partners and members of the affiliated partnerships and limited liability companies of TPGI Predecessor and other parties which held direct or indirect ownership interests in the properties engaged in certain formation transactions (the “Formation Transactions”). The Formation Transactions were designed to (i) continue the operations of TPGI Predecessor (ii) enable us to raise the necessary capital to acquire increased interests in certain of the properties and repay certain property level indebtedness, (iii) fund joint venture capital commitments, (iv) provide capital for future acquisitions, and (v) fund future development costs at our development properties. From inception through October 12, 2004, neither we nor the Operating Partnership had any material operations.

We have four primary areas of focus: property operations, property acquisitions, property development and redevelopment, and investment management. We believe our business model allows us to capitalize on opportunities for risk-adjusted investment returns from real estate ownership, while seeking to manage the volatility associated with the real estate industry by earning fees and other revenues derived from third parties.

As of December 31, 2004, we own interests in and asset manage six operating properties with 4.8 million rentable square feet and provide asset and/or property management services on behalf of third parties for an additional five operating properties with 2.6 million rentable square feet. These owned and managed properties consist of office, mixed-use and residential space located in the West Coast and Mid-Atlantic regions of the United States.

On October 13, 2004, we acquired a 25.0% interest in two properties, Reflections I and Reflections II in Reston, Virginia. Prior to this, we provided asset management services for these properties for the California State Teachers’ Retirement System (“CalSTRS”) pursuant to a separate account agreement with CalSTRS and

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will continue to provide asset management services to these two properties. On October 13, 2004, we also increased our ownership interest from 5% to 25% in our joint venture with CalSTRS, which holds an 85% interest in City National Plaza (formerly ARCO Plaza) located in downtown Los Angeles. As a result, our indirect interest in City National Plaza is 21.3%. We also acquired an unaffiliated third party’s 50.0% interest in our One Commerce Square property located in downtown Philadelphia.

We have a substantial development pipeline, owning or having the ability to develop land suitable for the development of approximately 4.8 million square feet of space. We developed and continue to manage the California Environmental Protection Agency (“CalEPA”) headquarters building in Sacramento, California.

We believe that our current infrastructure provides us with the ability to increase the number of properties we own and manage without a significant increase in corporate personnel. As of March 23, 2005, we had approximately 86 employees. Our executive management team is based in our Los Angeles and Philadelphia offices. None of our employees are currently represented by a labor union.

We maintain offices in Los Angeles, Newport Beach, Valencia, Sacramento, Dallas, Austin, San Antonio and Philadelphia. Our corporate headquarters are located at City National Plaza, 515 South Flower Street, Sixth Floor, Los Angeles, California 90071 and our phone number is (213) 613-1900. Our web site is www.tpgre.com. We make available through our web site this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we file or furnish them with the SEC.

Recent Developments

On March 2, 2005, TPG/CalSTRS, LLC, our joint venture with CalSTRS, completed the acquisition of four properties located in the western suburbs of Philadelphia totaling 862,948 square feet of office space. The occupancy for these properties ranges from 76% to 89%.

The properties acquired are:

The purchase price of the properties was $136.0 million and the acquisition and closing costs were $4.2 million. The purchase and costs were funded with $105.0 million of first mortgage financing proceeds and $35.2 million of equity provided by the joint venture, of which we provided $8.8 million and CalSTRS provided $26.4 million. The mortgage consists of a $77.5 million loan maturing on March 6, 2010, bearing interest at 5.31% per annum, and a $27.5 million loan maturing on March 1, 2007, bearing interest at LIBOR plus 1.75% per annum. The $27.5 million loan includes three one year extension options.

Foreign Operations

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

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Segment Financial Information

We operate in one business segment: the acquisition, development, ownership and management of commercial real estate. Additionally, we operate in one geographic area: the United States. The products for the office segment include rental of office space to tenants, parking, rental of storage space and other tenant services.

Our Business

We have four complementary and integrated areas of business focus:

Business and Growth Strategies

Our primary business objective is to achieve sustainable long-term growth in order to maximize long-term stockholder value. Our strategies to achieve this objective are:

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Our Strengths and Competitive Advantages

We believe we distinguish ourselves from other owners, operators, acquirers and developers of commercial properties in a number of ways and enjoy significant competitive strengths, including:

Competition

We compete with other developers, managers and owners of office and mixed-use real estate, many of which own properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services.

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Regulatory Issues

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, manager or tenant of real estate may be required to investigate and clean up hazardous or toxic substances at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by the parties in connection with the actual or threatened contamination.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos- containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials when the materials are in poor condition or in the event of construction, remodeling or renovation of a building.

We are not aware of any material noncompliance with federal and state regulations regarding hazardous or toxic substances and other environmental matters.

Americans With Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that the properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in public areas of our properties where the removal is readily achievable. Although we believe that our existing owned properties are in substantial compliance with the ADA, we have not recently conducted a portfolio-wide review to determine our compliance. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.

Insurance

We carry comprehensive liability, fire, flood, extended coverage, earthquake, terrorism and rental loss insurance covering all of the properties in our portfolio under a blanket policy. We believe the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. In the opinion of our management team, the properties in our portfolio are adequately insured. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons. We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, and terrorism insurance on all of our properties, in amounts and with deductibles which we believe are commercially reasonable.

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Risk Factors

Risks Related to Our Properties and Our Business

We generate a significant portion of our revenues as a result of our relationships with CalSTRS. If we were to lose these relationships, our financial results and growth prospects would be significantly negatively affected.

Our relationships with CalSTRS are a significant factor in our ability to achieve our intended business growth. Our separate account and joint venture relationships with CalSTRS provide us with substantial fee revenues. For the years ended December 31, 2004, 2003 and 2002, approximately 17.7%, 17.4%, and 6.0%, respectively, of our revenue has been derived from these relationships.

We cannot assure you that our relationships with CalSTRS will continue and we may not be able to replace these relationships with another strategic alliance that would provide comparable revenues. Our interest in our CalSTRS joint venture is subject to a buy-sell provision, and is subject to purchase by CalSTRS upon the occurrence of certain events. Under the buy-sell provision, either our Operating Partnership or CalSTRS can initiate a buy-out by delivering a notice to the other specifying a purchase price for all the joint venture’s assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price is based on what each venture partner would receive on liquidation if the joint venture’s assets were sold for the specified price and the joint venture’s liabilities paid and the remaining assets distributed to the joint venture partners. The buy-sell process can be initiated at any time after January 1, 2006. However, CalSTRS can initiate this provision earlier upon an event of default by us under the joint venture agreement or related management and development agreements or upon bankruptcy of our Operating Partnership, or upon the death or disability of either Mr. Thomas or John R. Sischo, one of our Executive Vice Presidents, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (a “buyout default”), or upon any transfer of stock of our company or limited partnership units in our Operating Partnership resulting in Mr. Thomas, his immediate family and controlled entities owning less than 30% of our securities entitled to vote for the election of directors. Our Operating Partnership can initiate the buy-sell provision earlier than January 1, 2006 upon an event of default of CalSTRS. Upon the occurrence of a buyout default allowing CalSTRS to initiate the buy-sell provisions prior to January 1, 2006, CalSTRS may instead elect to purchase our Operating Partnership’s joint venture interest based on a three percent discount to the appraised fair market value. Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30 days’ notice. Termination of either our joint venture or separate account relationship with CalSTRS could adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to co-investment capital to acquire additional properties.

Our joint venture investments may be adversely affected by our lack of control or input on decisions or shared decision-making authority or disputes with our co-venturers.

We hold interests in each of our operating properties in a joint venture or partnership. As a result, we do not exercise sole decision-making authority regarding the property, joint venture or other entity, including with respect to cash distributions or the sale of the property.

Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks including third parties who may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on significant decisions, because neither we nor our partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers such as if a partner or co-venturer were to become bankrupt and default on its reimbursement and contribution obligations to us, were to subject property owned by the partnership or joint

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venture to liabilities in excess of those contemplated by the partnership or joint venture agreement, or were to incur debts or liabilities on behalf of the partnership or joint venture in excess of the authority otherwise granted by the partnership or joint venture agreement. In some joint ventures or other investments we may make, if the entity in which we invest is a limited partnership, we may acquire all or a portion of our interest in such partnership as a general partner. In such event, we could be liable for all the liabilities of the partnership, although we would attempt to limit such liability to our investment in the partnership by investing through a subsidiary.

CalSTRS has rights under our joint venture agreement that could adversely affect us.

As of March 23, 2005, we hold interests in seven of our properties through our joint venture with CalSTRS. Our joint venture with CalSTRS requires a unanimous vote of the joint venture’s management committee on certain major decisions, including approval of annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with the approved annual plan. All other decisions, including sales of properties, are made based upon a majority decision of the management committee, which currently consists of two members appointed by CalSTRS and one member appointed by us. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result in an outcome contrary to our interests. In addition to CalSTRS’ ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could adversely affect us. Unless otherwise determined by the management committee of the joint venture (two out of the three members of which are appointed by CalSTRS), we are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization (defined as completion of the project and 85% of the net rentable area leased), except that the holding period for Reflections I and Reflections II, both of which are 100% leased, will be separately determined by the joint venture management committee. With respect to these two properties, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period, which could be less than five years. We have a right of first offer to purchase a joint venture property upon a required sale at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to assume control of the sale process. This may require us to sell a substantial portion of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.

We are required to present certain investment opportunities to CalSTRS which may limit our opportunities to make investments for our own account or with other third parties.

Under our joint venture agreement with CalSTRS, until the earlier of May 1, 2007 or the date CalSTRS has contributed an aggregate of $250 million to the joint venture, we are required to first present to CalSTRS for potential investment by the joint venture all core plus and value-add office property investment opportunities involving a total capital investment of $10 million or more that are defined within CalSTRS’ guidelines as moderate or high risk projects. If CalSTRS fails to approve the investment within five business days of receipt of all required information, then we may pursue the opportunity for our own account or in joint venture with another third party investor. This obligation may limit our ability to obtain additional separate account relationships for non-core office properties, as investment opportunities for this type of property must be first presented by us to CalSTRS.

We must expand our business to establish additional strategic alliances to decrease our dependence on our relationship with CalSTRS or our prospects for growth may be limited.

We intend to establish and extend our business to encompass strategic relationships beyond our joint venture with CalSTRS. Our business strategy includes co-investing with third parties and earning revenues from fee services and property management. Currently, our only relationship where we serve as an investment advisor and portfolio manager is with CalSTRS. In order to achieve our objectives of acting as an investment advisor and portfolio manager for others and decrease our dependence on our relationship with CalSTRS, we intend to

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establish new relationships and extend existing relationships and alliances with institutional and other investors. Without adequate strategic partnerships and alliances in place, we may have to invest more equity than we desire in property acquisitions and incur greater risk than we prefer on projects. In addition, our efforts with respect to projects may not be as effective as they would have been with the greater access to capital afforded by these strategic relationships. In many cases, the institutional investors with which we intend to form alliances already have extensive relationships with other property developers, managers and investment advisors. If we fail to establish, successfully manage or maintain these alliances, our ability to achieve business growth and revenue diversification could suffer and our business and operating results could be harmed.

We depend on significant tenants, and their failure to pay rent could seriously harm our operating results and financial condition.

As of December 31, 2004, the 20 largest tenants for properties in which we hold an ownership interest collectively leased 61.4% of the rentable square feet of space, representing 86.3% of the total annualized rent generated by these properties. Consolidated Rail Corporation, together with its wholly-owned subsidiary New York Central Lines, LLC (“Conrail”), leases the substantial majority of space at Two Commerce Square and accounted for approximately 41.6% of the total annualized rent at December 31, 2004. In addition, Conrail’s rental revenues and tenant reimbursements accounted for approximately 42.8% of total revenue for the year ended December 31, 2004. Our existing lease with Conrail expires in two stages in 2008 and 2009. Conrail has subleased substantially all of its space under lease, and we have entered into direct lease agreements with many of these sublease tenants. However, these new leases are at lower rental rates, and we expect to experience a substantial decline in rental revenues from Two Commerce Square when the existing lease with Conrail expires.

We rely on rent payments from our tenants as a source of cash to finance our business. Any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to our company.

In particular, if any of our significant tenants becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a property and prevents us from leasing that property, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce the payment obligations under the lease. In those circumstances, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms.

Bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property. A tenant bankruptcy would delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these amounts. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy amounts due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims in the event of the bankruptcy of a large tenant, which would harm our financial condition.

Our operating results depend upon the regional economies in which our properties are located and the demand for office and other mixed-use space and an economic downturn in these regions could harm our operating results.

Our operating and development properties are located in three geographic regions of the United States: the West Coast, Southwest and Mid-Atlantic regions. Historically, the largest part of our revenues has been derived

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from our ownership and management of properties consisting primarily of office buildings. A decrease in the demand for office space in these geographic regions, and Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are susceptible to adverse developments in these regions, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, increased telecommuting, terrorist targeting of high-rise structures, infrastructure quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors, and the national and regional office space market such as oversupply of or reduced demand for office space. Some of the regional issues we face include the more highly regulated and taxed economy of Southern California and high local and municipal taxes for our Philadelphia properties. Any adverse economic or real estate developments in a local region, or any decrease in demand for office space resulting from the local regulatory environment, business climate or energy or fiscal problems, could adversely impact our revenue and profitability, thereby causing a significant downturn in our financial condition, results of operations, cash flow, the trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our debt level reduces cash available to fund business growth and may expose us to the risk of default under our debt obligations.

As of December 31, 2004, our total consolidated indebtedness is approximately $295.9 million. In addition, we own interests in unconsolidated entities subject to total indebtedness in the amount of $266.3 million as of December 31, 2004. In March 2005, our joint venture with CalSTRS, which is an unconsolidated entity, obtained an additional $105.0 million in debt financing for the acquisition of four properties in suburban Philadelphia. In addition, the joint venture also intends to obtain financing of approximately $31.8 million relating to the Reflections I and Reflections II properties, of which $7.9 million will be distributed to us. Mortgage loans, which comprise a portion of both the consolidated and unconsolidated indebtedness, are secured by first deeds of trust in the related real property. Mezzanine loans and other secured loans, which comprise the remaining portion of both the consolidated and unconsolidated indebtedness, are secured by our direct or indirect ownership interest in the entity that owns the related real property. Additionally, the Operating Partnership has guaranteed loans on our 2101 Market Street and Four Points Centre properties up to a maximum amount of $5.5 million. Mr. Thomas guarantees approximately $7.5 million of the mezzanine loans for Two Commerce Square, and we have accordingly agreed to indemnify Mr. Thomas in the event his guarantees are called upon. We may incur significant additional debt to finance future acquisition and development activities. It is possible the required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties profitably. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

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If any one of these events were to occur, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations. In addition, foreclosures could also result in our being liable under the terms of our indemnification agreement with Mr. Thomas if we were required to sell all or a portion of our interests in One Commerce Square or Two Commerce Square.

We have a substantial amount of debt which bears interest at variable rates. Our failure to hedge effectively against interest rate changes may adversely affect our results of operations.

As of December 31, 2004, $7.5 million of our consolidated debt and $246.3 million of our unconsolidated debt was at variable interest rates. The unconsolidated debt consists of a $200 million mortgage facility currently outstanding (as to which we have purchased an interest rate cap) with an additional borrowing capacity of up to $125 million of senior mezzanine debt (as to which we are required to enter into interest rate cap agreements for each advance). In addition, we entered into a $25 million junior mezzanine variable rate loan. We have purchased an interest rate cap for this loan.

In March 2005, our joint venture with CalSTRS, which is an unconsolidated entity, obtained an additional $105.0 million in debt financing, of which $27.5 million is at variable interest rates. In addition, the joint venture intends to obtain financing of approximately $31.8 million relating to the Reflections I and Reflections II properties, which we expect to be at a fixed interest rate.

We intend to generally limit our exposure to interest rate volatility by using interest rate hedging arrangements and swap agreements. These arrangements involve risks, including that our hedging or swap transactions might not achieve the desired effect in eliminating the impact of interest rate fluctuations, or that counterparties may fail to honor their obligations under these arrangements. As a result, these arrangements may not be effective in reducing our exposure to interest rate fluctuations and this could reduce our revenue, require us to modify our leverage strategy, and adversely affect our expected investment returns.

We may be unable to complete acquisitions necessary to grow our business, and even if consummated, we may fail to successfully operate these acquired properties.

Our planned growth strategy includes the acquisition of additional properties as opportunities arise. We regularly evaluate the top 20 markets in the United States for office, mixed-use and other properties for strategic opportunities. Our ability to acquire properties on favorable terms and successfully operate them is subject to the following significant risks:

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If we cannot complete property acquisitions on favorable terms, or operate acquired properties to meet our expectations, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, trading price of our common stock, and impairing our ability to satisfy our debt service obligations.

Our real estate acquisitions may result in disruptions to our business as a result of the burden in negotiating these acquisitions and in integrating operations placed on our management.

Our business strategy includes acquisitions and investments in real estate on an ongoing basis. These acquisitions may cause disruptions in our operations and divert management’s attention from day-to-day operations, which could impair our relationships with our current tenants and employees. In addition, if we acquire real estate by acquiring another entity, we may be unable to effectively integrate the operations and personnel of the acquired business. In addition, we may be unable to train, retain and motivate any key personnel from the acquired business. If our management is unable to effectively implement our acquisition strategy, we may experience disruptions to our business.

As a result of the limited time during which we have to perform due diligence of many of our acquired properties, we may become subject to significant unexpected liabilities and our properties may not meet projections.

When we enter into an agreement to acquire a property or portfolio of properties, we often have limited time to complete our due diligence prior to acquiring the property. To the extent we underestimate or fail to investigate or identify risks and liabilities associated with the properties we acquire, we may incur unexpected liabilities or the property may fail to perform as we expected. If we do not accurately assess the liabilities associated with properties prior to their acquisition, we may pay a purchase price that exceeds the current fair value of the net identifiable assets of the acquired property. As a result, intangible assets would be required to be recorded, which could result in significant accounting charges in future periods. These charges, in addition to the financial impact of significant liabilities that we may assume, could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations, trading price of our common stock and impairing our ability to satisfy our debt service obligations.

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We have a near-term expectation of significant growth, and we may not be able to adapt our management and operational systems to respond to this growth, including the acquisition and integration of additional properties without unanticipated disruption or expense.

In order to achieve desired and planned business growth, we intend to significantly expand our asset and property management activities, and acquire a significant number of properties in the next 12 to 24 months. With the expected growth of our portfolio, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate these properties into our portfolio and manage these additional properties without operating disruptions or unanticipated costs. The acquisition of additional properties would generate additional operating expenses. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. Our failure to successfully integrate any future acquisitions into our portfolio could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations, trading price of our common stock and impairing our ability to satisfy our debt service obligations.

We may be unable to successfully complete and operate properties under development, which would impair our financial condition and operating results.

A significant part of our business is devoted to the development of office, mixed-use and other properties, including the redevelopment of core plus and value-add properties. Our development, construction and redevelopment activities involve the following significant risks:

If we are not successful in our property development initiatives, this could adversely impact our revenue and profitability, causing a significant downturn in our business, including our financial condition, results of operations, trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our efforts to expand our geographic presence and diversify into other regional real estate markets may not be successful, thereby constraining our growth to markets in which we currently operate.

We intend to expand our business to new geographic regions where we expect the development, ownership and management of property to result in favorable risk-adjusted investment returns. In order for us to achieve economies of scale, we generally target ownership of 500,000 or more rentable square feet in a market. It may be difficult for us to achieve this level of ownership and our initial entry into a particular market may result in higher administrative expenses for us initially. Presently, we do not possess the same level of familiarity with the

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development, ownership and management of properties in locations other than the West Coast, Southwest and Mid-Atlantic regions in the United States, which could adversely affect our ability to develop properties outside these regions successfully or at all or to achieve expected performance.

We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.

We face significant competition from other developers, managers and owners of office and mixed-use real estate, many of which own properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services. A number of our competitors are larger and better able to take advantage of efficiencies created by size, and have better financial resources, or increased access to capital at lower costs, and may be better known in regional markets in which we compete. Our smaller size as compared to some of our competition may increase our susceptibility to economic downturns and pressures on rents. Our failure to compete successfully in our industry would materially affect our business prospects.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire resulting in increased vacancy rates, lower revenue and an adverse effect on our operating results.

As of December 31, 2004, leases representing 6.8% and 1.2% of the rentable square feet of the office and mixed-use properties in which we hold an ownership interest will expire in 2005 and 2006, respectively. Further, an additional 27.0% of the square feet of these properties was available for lease on that date. Rental rates above the current market rate at some of the properties in our office and mixed-use portfolio may require us to renew or re-lease some expiring leases at lower rates. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our revenue and profitability, could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations. In particular, a significant amount of space at our Two Commerce Square property has historically been leased to Conrail. This lease expires in two stages in 2008 and 2009. Conrail currently subleases substantially all of its space to a number of subtenants. While we have entered into agreements with many of the subtenants for direct leases once their sublease term expires, the rental rates are lower than paid by the current tenant. As a result, we currently expect our aggregate revenues from this property will be lower following the expiration of the Conrail lease in 2008 and 2009. If we are unable to lease the remaining portion of the space currently leased by Conrail in Two Commerce Square prior to the expiration of the lease and assuming all subtenants to the Conrail lease exercise no renewal options and exercise all early termination options, our rental revenue (excluding tenant reimbursements revenue) computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”) would decrease by $3.9 million in 2008 as compared to 2007, $4.8 million in 2009 as compared to 2008, $6.9 million in 2010 as compared to 2009 and $2.1 million in 2011 as compared to 2010.

Our growth depends on external sources of capital, some of which are outside of our control. If we are unable to access capital from external sources, we may not be able to implement our business strategy.

Our business strategy requires us to rely significantly on third-party sources to fund our capital needs. We may not be able to obtain debt or equity on favorable terms or at all. Any additional debt we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:

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If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or continue to fund operations.

We could incur significant costs related to government regulation and private litigation over environmental matters, including with respect to clean-up of contaminated properties and litigation from any harm caused by environmental hazards on our properties.

Under various federal, state and local environmental laws and regulations, a current or previous owner, manager or tenant of real estate may be required to investigate and clean up hazardous or toxic substances at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by the parties in connection with the actual or threatened contamination. With respect to properties in which we will hold an ownership interest, we have not obtained any recent environmental reports regarding conditions at the properties, nor do we intend to. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under the laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs to the extent such contributions are possible to obtain. These costs may be substantial, and may exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination on a property may limit the ability of the owner, operator or tenant to sell or rent that property or to borrow using the property as collateral, and may cause our investment in that property to decline in value.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, by signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building incorporating asbestos-containing materials or potentially asbestos-containing materials that we own or manage.

We are aware of potentially environmentally hazardous or toxic materials at two of our properties in which we hold an ownership interest. At our 2101 Market Street property, we continue to review groundwater monitoring initiated by the Pennsylvania Department of Environmental Protection as a result of a gasoline spill that occurred on the premises in April 2002, due to an accident caused by the tenant’s agent. The tenant undertook remedial procedures, removing contaminated soil. Our lease requires the tenant (or its successor in interest) to indemnify us against all costs and expenses of every kind relating directly or indirectly to the tenant’s use and occupancy of the premises. With respect to asbestos materials present at our City National Plaza property, these materials have been removed or abated from the tenant areas of the office towers. We are in the process of remediating asbestos materials on the lower levels of the building structure.

Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials. These laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and

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potentially asbestos-containing materials. In addition, fines may be imposed on owners or managers of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potentially asbestos-containing materials.

We are subject to high taxes relating to our California and Philadelphia properties that could negatively affect our operating results and may also be adversely affected by new legislation.

Owners of California real estate are subject to high taxes. The California legislature is currently considering legislation that, if enacted, could have a material affect on our operating results. This proposed legislation would result in a significant increase in real estate taxes imposed on our properties located in California.

Voters in the State of California previously passed Proposition 13, which generally limits annual real estate tax increases to 2% of assessed value per annum. From time to time, various groups have proposed repealing Proposition 13, or providing for modifications such as a “split roll tax”, whereby commercial property, for example, would be taxed at a higher rate than residential property. Given the uncertainty, it is not possible to quantify the risk to us of a tax increase or the resulting financial impact of any increase. The majority of our California property leases provide for the pass-through of real estate taxes to tenants.

In Philadelphia, one downtown development site has been designated as a Keystone Opportunity Improvement Zone site by the state of Pennsylvania. This designation confers upon occupants a 15-year abatement of all state and local taxes except the city wage tax. The development of this office tower could, depending on overall supply-demand fundamentals, have a negative impact on central business district Philadelphia rental rates and building values. Further, the transfer tax rate in the City of Philadelphia, which we could incur upon a sale of one of our properties, is one of the highest in the United States and could be a very significant cost in the event of the sale of one of our Philadelphia properties. In Philadelphia, transfers of fee title or partnership interests representing 90% or more of property ownership are subject to a tax of 4% of the transaction price. The 4% amount is comprised of a 3% levy by the City of Philadelphia and a 1% charge by the Commonwealth of Pennsylvania. The transaction price, if not specifically disclosed to the taxing authorities, must be deemed reasonable, and is therefore typically the assessed value of the property for real estate tax purposes.

The risk of future terrorist attacks in the United States could harm the demand for and the value of our properties which are located in major metropolitan areas.

The risk of future terrorist attacks in the U.S., like the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of our properties. We manage properties that are well-known landmarks in high visibility metropolitan areas that may be perceived as more likely terrorist targets than lower profile properties in less commercial areas, which could potentially reduce the demand for and value of these properties. A decrease in demand could make it difficult for us to renew or re-lease our properties at rates equal to or above historical lease rates.

Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs. Further, the availability of insurance for acts of terrorism may be limited or may cost more. The three operating properties in which we own interests located in Philadelphia, Pennsylvania—One Commerce Square, Two Commerce Square and 2121 Market Street—are located within a three city block area. Together, these three properties represented approximately 69.2% of the annualized rent for properties in which we hold an ownership interest as of December 31, 2004. Because these properties are located closely together, a catastrophic event in this area could materially damage, destroy or impair the use by tenants of all of these properties. To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases with us could be adversely affected, including being unable to make timely rental payments and defaulting under existing leases. Additionally, some tenants have termination rights in respect of certain casualties. Under the terms of our financing documents, we may be required to apply casualty

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proceeds to repay loans and may not be able to rebuild or restore the property unless we are able to obtain alternate financing. If we are entitled to receive casualty proceeds, we may not be able to rebuild or restore the property, and we may be forced to recognize taxable gain on the affected property. Failure to reinvest casualty proceeds in the affected property or properties could also result in obligations under our tax indemnification agreement with Mr. Thomas.

Tax indemnification obligations that may arise in the event we or our Operating Partnership sell an interest in either of two of our properties could limit our operating flexibility.

We and our Operating Partnership agreed to indemnify Mr. Thomas against adverse tax consequences in the event that our Operating Partnership or the underlying property joint venture directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in either One Commerce Square or Two Commerce Square. These two properties represented 68.5% of our owned portfolio’s annualized rent as of December 31, 2004. This indemnification period will be four years, unless Mr. Thomas and related entities contribute the remaining 11% minority interest in each of One Commerce Square and Two Commerce Square to us prior to October 13, 2008 for not more than $4 million in the aggregate, in which event the indemnification period will expire on October 13, 2013, which may be extended to October 13, 2016 provided Mr. Thomas and his controlled entities collectively retain at least 50% of the units received by them in the Formation Transactions. Our indemnification obligation is for all direct and indirect adverse tax consequences. Our agreement to indemnify Mr. Thomas was not the result of arm’s-length negotiations and there is no assurance that our agreement is comparable to what may have resulted were the negotiations between unaffiliated third parties. We have also agreed to use commercially reasonable efforts to make approximately $221 million of debt available to be guaranteed by entities controlled by Mr. Thomas, by Mr. Fox, a non-employee member of our board of directors, and by Mr. Gilchrist, an individual formerly affiliated with Maguire Thomas Partners. We agreed to make this debt available for guarantee in order to assist Mr. Thomas and these other persons in preserving their tax position after their contributions. In addition, our tax indemnification obligation could occur involuntarily in the event of a condemnation of or foreclosure on one of these properties. We do not presently intend to sell any of our interest in these properties in transactions that would give rise to our tax indemnification obligation. A calculation of these damages under our tax indemnification agreement will not be based on the time value of money or the time remaining in the indemnification period.

Risks Related to the Real Estate Industry

Illiquidity of real estate investments and the susceptibility of the real estate industry to economic conditions could significantly impede our ability to respond to adverse changes in the performance of our properties.

Our ability to achieve desired and projected results for growth of our business depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may adversely impact results of operations and the value of our properties. These events include:

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In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If any of these events were to happen, our revenue and profitability could be impaired, causing a significant downturn in our financial condition, results of operations, cash flow, and trading price of our common stock and our ability to satisfy our debt service obligations could be impaired.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our financial condition.

All of our commercial properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Although we believe that the properties in which we hold an ownership interest substantially comply with the requirements of the ADA, we have not recently conducted a portfolio-wide investigation to determine our compliance. Compliance with the ADA requirements could require removal of access barriers. Non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. Typically, we are responsible for changes to a building structure that are required by the ADA, which can be costly. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. We may be required to make substantial capital expenditures to comply with these requirements thereby limiting the funds available to operate, develop and redevelop our properties and acquire additional properties. As a result, these expenditures could negatively impact our revenue and profitability.

Potential losses may not be covered by insurance and may result in our inability to repair damaged properties and we could lose invested capital.

We carry comprehensive liability, fire, flood, extended coverage, earthquake, terrorism, business interruption and rental loss insurance under our blanket policy covering all of the properties which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the CalEPA headquarters building under our blanket policy because the sole tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. Generally, we do not carry insurance for losses from riots, war or acts of God. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons. Some of our policies, like those covering losses due to earthquakes and terrorism, are subject to limitations involving deductibles and policy limits which may not be sufficient to cover losses. We either own or have interests in a number of properties in Southern California, an area especially prone to earthquakes.

Under their leases, tenants are generally required to indemnify us from liabilities resulting from injury to persons, air, water, land or property, on or off the premises due to activities conducted by them on our properties. There is an exception for claims arising from the negligence or intentional misconduct by us or our agents. Additionally, tenants are generally required, with the exception of governmental entities and other entities that are self-insured, to obtain and keep in force during the term of the lease liability and property damage insurance policies issued by companies holding ratings at a minimum level at their own expense.

Although we have not experienced such a loss to date, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property, including lost revenue from unpaid rent from tenants. In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if this property was irreparably damaged. In the event of a significant loss at one or more of the properties covered by the blanket policy, the remaining insurance under our policy, if any, could be insufficient to adequately insure our remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than our current policy.

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Risks Related to Our Organization and Structure

Our senior management has existing conflicts of interest with us and our public stockholders that could result in decisions adverse to our company.

Mr. Thomas owns 1,200 shares of common stock and 46,667 shares of restricted common stock, and entities affiliated with Mr. Thomas own or control 2,200 shares of common stock, 16,666,666 shares of limited voting stock and hold 16,666,666 operating partnership units (including operating partnership units held for the benefit of Thomas S. Ricci, Randall L. Scott, and Mr. Sischo). Each of Messrs. Ricci, Scott and Sischo received an indirect interest in operating partnership units, and, together with Diana M. Laing, our Chief Financial Officer, each executive officer received a direct grant of restricted incentive units. Mr. Ricci received an interest in 183,334 operating partnership units and 200,001 incentive units; Mr. Scott received an interest in 233,334 operating partnership units and 250,001 incentive units; Mr. Sischo received an interest in 266,667 operating partnership units and 216,667 incentive units; and Ms. Laing received 63,334 incentive units. The various terms of these equity and incentive interests could create conflicts of interest with our public stockholders. Members of executive management could be required to make decisions that could have different implications for our Operating Partnership and for us, including:

For example, an acquisition in exchange for the issuance by our Operating Partnership of additional operating partnership units would dilute the interests of members of our management team as limited partners in our Operating Partnership. Dispositions could trigger our tax indemnification obligations with respect to Mr. Thomas. Dividends paid by us to our public stockholders would decrease our funds available to reinvest in our business.

We have a holding company structure and rely upon funds received from our Operating Partnership to pay liabilities.

We are a holding company. Our primary asset is our general partnership interest in our Operating Partnership. We have no independent means of generating revenues. To the extent we require funds to pay taxes or other liabilities incurred by us, to pay dividends or for any other purpose, we must rely on funds received from our Operating Partnership. If our Operating Partnership should become unable to distribute funds to us, we would be unable to continue operations after a short period. Most of the properties owned by our subsidiaries and joint ventures are encumbered by loans that restrict the distribution of funds to our Operating Partnership. The loans for One Commerce Square, Two Commerce Square, City National Plaza and 2121 Market Street contain lockbox arrangements, reserve requirements, financial covenants and other restrictions and provisions that prior to an event of default may prevent the distribution of funds from the subsidiaries who own these properties to our Operating Partnership. In the event of a default under these loans, the defaulting subsidiary or joint venture would be prohibited from distributing cash to our Operating Partnership. As a result, our Operating Partnership may be unable to distribute funds to us and we may be unable to use funds from one property to support the operation of another property. As we acquire new properties and refinance our existing properties, we may finance these properties with new loans that contain similar provisions. Some of the loans to our subsidiaries and joint ventures may contain provisions that restrict us from loaning funds to our subsidiaries or joint ventures. If we are permitted to loan funds to our subsidiaries or joint ventures, our loans generally will be subordinated to the existing debt on our properties.

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Mr. Thomas has a significant vote in certain matters as a result of his ownership of 100% of our limited voting stock.

Each entity that received operating partnership units in our Formation Transactions received shares of our limited voting stock that are paired with units in our Operating Partnership on a one-for-one basis. All of these entities are directly or indirectly controlled by Mr. Thomas, and, as a result, Mr. Thomas controls 100% of our outstanding limited voting stock, or 53.7% of our outstanding voting stock. Although not entitled to dividends or other distributions, these limited voting shares are entitled to one vote per share in the election of directors, the approval of certain extraordinary transactions including any merger or sale of the company, amendments to our certificate of incorporation and any other matter required to be submitted to a separate class vote under Delaware law. Mr. Thomas may have interests that differ from that of our public stockholders, including by reason of his interests held in operating partnership units, and may accordingly vote as a stockholder in ways that may not be consistent with the interests of our public stockholders. This significant voting influence over certain matters may have the effect of delaying, preventing or deterring a change of control of our company, or could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company.

Our success depends on key personnel, the loss of whom could impair our ability to operate our business successfully.

We depend on the efforts of key personnel, particularly Mr. Thomas, our Chairman, President and Chief Executive Officer. Among the reasons that Mr. Thomas is important to our success is that he has an industry reputation developed over more than 25 years in the real estate industry that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with these parties could diminish. In addition, Mr. Thomas is 68 and, although he has informed us that he does not currently plan to retire, we cannot be certain how long he will continue working on a full-time basis.

Many of our other senior executives also have significant real estate industry experience. Mr. Scott has extensive development and management experience on several large-scale projects, including the development, construction and management of One Commerce Square and Two Commerce Square. Mr. Sischo and Mr. Scott are jointly responsible for oversight of our relationship with CalSTRS. Mr. Sischo is responsible for our acquisition efforts. Mr. Ricci has been extensively involved in the development of large, mixed-use and commercial projects. Ms. Laing has served as chief financial officer of two publicly-traded real estate investment trusts. While we believe that we could find acceptable replacements for these executives, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel. A departure of either Mr. Thomas or Mr. Sischo could also have adverse effects on our joint venture relationship with CalSTRS, including the possible sale of our joint venture interest to CalSTRS at 97% of fair value.

Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.

Some of the provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to possibly sell their shares at a premium over the then market price. Our certificate of incorporation and bylaws contain provisions including the following:

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In addition, our certificate of incorporation authorizes the board of directors to issue up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. No shares of preferred stock are outstanding and we have no present plans to issue any preferred stock. The issuance of any preferred stock, however, could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders’ control of our company.

Finally, we are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder.

The provisions of our certificate of incorporation and bylaws, described above, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if these events would be in the best interests of our stockholders.

We could authorize and issue stock without stockholder approval, which could cause our stock price to decline and dilute the holdings of our existing stockholders.

Our certificate of incorporation authorizes our board of directors to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of the classified or unclassified shares. Although our board of directors has no intention at the present time, it could establish a series of preferred stock that could, depending on the terms of the series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Forward-Looking Statements

This report contains statements that constitute forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. Although the information is based on our current estimations, actual results could vary. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

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ITEM 2. PROPERTIES

Our Ownership Interest Properties

Our properties are located in the West Coast, Southwest, and Mid-Atlantic regions of the United States, consisting primarily of office space and also including mixed-use, multi-family and retail properties. We hold an 89% ownership interest in each of One Commerce Square and Two Commerce Square. Mr. Thomas or entities controlled by Mr. Thomas continue to hold the remaining 11% interest in each of these properties. We intend to seek to acquire the remaining 11% interest in each of these properties after October 2007. We hold a 50% interest in 2121 Market Street; the other 50% interest is held by an entity owned by Philadelphia Management, an unaffiliated Philadelphia-based real estate developer. As of December 31, 2004, we provide asset and/or property management services for four properties on behalf of CalSTRS under a separate account relationship. We have an ownership interest of 25% in a joint venture with CalSTRS, which holds a 100% interest in Reflections I and II, and an 85% interest in City National Plaza. Our indirect interest in City National Plaza is 21.3%. City National Plaza is a value-add property. Our joint venture has a capital budget of $220 million to fund our redevelopment and repositioning of the property, which we estimate will take approximately four years to complete.

An overview of these properties as of December 31, 2004, including development properties, is presented below:

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For financial accounting purposes, the minimum base rent associated with the Fulbright & Jaworski and Jones Day leases are recognized on a straight-line basis over the term of these leases beginning when the tenant takes possession and ending when the leases expire assuming all early lease termination options, if any, are exercised, and all renewal options, if any, are not exercised. The excess of rental revenue recognized over amounts contractually due under these leases is included in deferred rents on the balance sheet of our joint venture with CalSTRS (which is an unconsolidated subsidiary of our company). Reimbursement of operating expenses will not be recorded by our joint venture on a straight-line basis as the amounts are not fixed and determinable. Therefore, there will be no accounting recognition by our joint venture for tenant reimbursements relating to these operating expenses until such time as these tenants begin reimbursing our joint venture for such expenses.

At least $20 million in structural upgrades to the property are required under the leases with City National Bank, Fulbright & Jaworski, and Jones Day, which must be completed by December 31, 2006 under the Jones Day lease and by December 31, 2008 under the City National Bank and Fulbright & Jaworski leases.

City National Plaza was re-measured in accordance with Building Owners and Managers Association (“BOMA”) 1996 standards concurrent with the acquisition of an interest by our joint venture with CalSTRS in 2003. The total BOMA 1996 square footage for the property is 2,648,920. However, the total property net rentable square feet used for the calculations with respect to percent leased, annualized net rent per leased square foot and annualized net effective rent per leased square foot in the table above represents the sum of the square footage of existing leases, a majority of which do not reflect BOMA 1996 measurement guidelines and the square footage of available space determined in accordance with BOMA 1996 measurement guidelines. We are not permitted to use the newer BOMA guidelines in our calculations with respect to the leases in place for existing tenants at the time we acquired the property as this would effectively increase the rentable square feet leased and, correspondingly, the rent under the lease. The City National Plaza rentable square footage under existing lease contracts is 2,566,884. The resulting total portfolio square footage is 4,671,660.

Our portfolio in which we presently have an ownership interest includes approximately 3,583 vehicle spaces which are revenue generating within on-site and off-site parking facilities. The following table presents an overview of these garage properties as of December 31, 2004.

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Our Development Properties

Our development properties in which we own an interest or hold an option to purchase as of December 31, 2004, are presented below. At present, we are in the pre-development phase with respect to each of these properties. The periods under the heading “Potential Build-out Period” represents our current estimate of the period from commencement of construction through completion of the structural shell, core and tenant improvements. Actual commencement, completion and cost of construction will vary based upon market conditions and other factors.

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Our Managed Properties

In addition to our portfolio of operating and development properties in which we hold an ownership interest, we provide asset and/or property management services for five properties as a fee service for third parties. We asset and property manage four properties through our separate account relationship with CalSTRS. We developed and continue to property manage the CalEPA headquarters building. The table below presents an overview of those properties which we manage for third parties as of December 31, 2004. In addition, we provide asset and/or property management services for the three properties that are held within our joint venture with CalSTRS as of December 31, 2004.

ITEM 3. LEGAL PROCEEDINGS

We have been named as a defendant in a number of lawsuits in the ordinary course of business. Management believes that the ultimate settlement of these suits will not have a material adverse effect on our financial position and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 11, 2004, our Certificate of Incorporation was amended pursuant to a written consent by our stockholders, as described in the Form 8-K filed by us on October 18, 2004.

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PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

In conjunction with the completion of our Offering, our common stock began trading on the Nasdaq National Market under the symbol “TPGI” on October 13, 2004. As of March 23, 2005, there were two stockholders of record. The following table sets forth, for the period indicated, the intra-day high and low per share bid prices in dollars on the Nasdaq for our common stock.

The closing price of our common stock as of March 23, 2005 was $12.39.

We paid no dividends during the fourth quarter of 2004. We intend to declare annual distributions on our common stock. The actual amount and timing of distributions, however, will be at the discretion of our board of directors and will depend upon our financial condition, and no assurance can be given as to the amounts or timing of future distributions. Factors that could influence our ability to declare and pay dividends are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

In March 2005, we declared a first quarter 2005 dividend of $0.06 per common share. The dividend will be paid on April 14, 2005 to shareholders of record as of March 31, 2005.

There were no issuer purchases of equity securities during the year ended December 31, 2004.

Use of Proceeds From the Offering

The Offering consisted of the sale of 14,285,714 shares of common stock at $12.00 per share, resulting in net proceeds to our company of $151.9 million, after underwriting discounts and expenses of the Offering. We utilized a portion of the net proceeds from the Offering to acquire a 25% interest in Reflections I and Reflections II for a total of $11.8 million, increase our indirect ownership interest in City National Plaza from 4.3% to 21.3% for a payment of $21 million, acquire the 50% interest in One Commerce Square owned by an unaffiliated third party for a purchase price of $24 million, plus the assumption of approximately $10 million of debt principal and interest repayment obligations, repay aggregate indebtedness of $10.7 million relating to One Commerce Square, redeem preferred equity interests related to One Commerce Square held by an unaffiliated mezzanine debt lender on the property for $11.7 million, and fund a required reserve of $2.1 million.

In March 2005, we contributed $8.8 million of the net proceeds to our joint venture with CalSTRS to fund the acquisition of four properties in suburban Philadelphia by the joint venture.

We intend to use the remaining net proceeds of the Offering to repay principal of $9.2 million on the mezzanine loan on One Commerce Square when this loan becomes prepayable in April 2005, fund development costs associated with our development properties, and partially fund our co-investment obligation to our joint venture with CalSTRS or other future property acquisitions.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial and operating data on a historical basis for our company and on a combined historical basis for TPGI Predecessor. We have not presented historical information for our company prior to October 13, 2004, the date on which we consummated our Offering, because during the period from our formation until our Offering, we did not have any material corporate activity.

The following data should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

TPGI Predecessor’s historical combined financial data includes the following operations and properties for periods prior to October 13, 2004:

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Thomas Properties Group, Inc. and TPGI Predecessor

(dollars in thousands, except per share data)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Where appropriate, the following discussion includes analysis of the effects of our Offering, the formation transactions and certain other transactions. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-K entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the sections in this report entitled “Risk Factors” and “Forward-Looking Statements.”

Overview and Background

We are a full-service real estate operating company that owns, acquires, develops and manages office, retail and multi-family properties on a nationwide basis. We conduct our business through our consolidated Operating Partnership, of which we own 46.3% and have control over the major decisions of the Operating Partnership.

During the period from our formation until we commenced operations upon consummation of our Offering on October 13, 2004, we did not have any material corporate activity. Because we believe that a discussion of the results of our company prior to the consummation of our Offering would not be meaningful, we have set forth below a discussion of our results of operations beginning October 13, 2004 and TPGI Predecessor’s historical results of operations prior to that date.

Critical Accounting Policies and Estimates

Accounting estimates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the relevant reporting periods. Certain accounting policies are considered to be critical accounting estimates, as these policies require us to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. We believe the following accounting policies reflect the more significant estimates used in the preparation of our financial statements. For a summary of significant accounting policies, see note 2 to our financial statements, included elsewhere in this report.

Investments in Real Estate. The price that we pay to acquire a property is impacted by many factors including the condition of the buildings and improvements, the occupancy of the building, the existence of above and below market tenant leases, the creditworthiness of the tenants, favorable or unfavorable financing, above or below market ground leases and numerous other factors. Accordingly, we are required to make subjective assessments to allocate the purchase price paid to acquire investments in real estate among the assets acquired and liabilities assumed based on our estimate of the fair values of such assets and liabilities. This includes determining the value of the buildings and improvements, land, any ground leases, tenant improvements, in-place tenant leases, tenant relationships, the value (or negative value) of above (or below) market leases and any debt assumed from the seller or loans made by the seller to us. Each of these estimates requires a great deal of judgment and some of the estimates involve complex calculations. Our calculation methodology is summarized in Note 2 to our consolidated and combined financial statements. These allocation assessments have a direct impact on our results of operations because if we were to allocate more value to land there would be no depreciation with respect to such amount or if we were to allocate more value to the buildings as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the terms of the leases. Additionally, the amortization of value (or negative value) assigned to non-market rate leases is recorded as an adjustment to rental

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revenue as compared to amortization of the value of in-place leases and tenant relationships, which is included in depreciation and amortization in our consolidated and combined statements of operations.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate we would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We evaluate a property for potential impairment when events or changes in circumstances indicate that the current book value of the property may not be recoverable. In the event that these periodic assessments result in a determination that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. Estimates of expected future net cash flows are inherently uncertain and are based on assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. These estimates require us to make assumptions relating to, among other things, future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future sale of the property.

Revenue recognition. Leases with tenants are accounted for as operating leases. Rental income is recognized as earned based upon the contractual terms of the leases with tenants. Minimum annual rents are recognized on a straight-line basis over the lease term, commencing on the date that possession is taken by the tenant, regardless of when the payments are made. The deferred rents asset on our balance sheets represents the aggregate excess rental revenue recognized on a straight-line basis over the cash received under the applicable lease provisions. Our leases generally contain provisions that require tenants to reimburse us for a portion of property operating expenses and real estate related taxes associated with the property. These reimbursements are recognized in the period the related expenses are incurred. Real estate commissions on leases are generally recorded as income after we satisfy all obligations under the commission agreement. A typical commission agreement provides that we earn 50% of the lease commission upon the execution of the lease agreement by the tenant. The remaining 50% of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies will delay recognition of commission revenue until those contingencies are satisfied. Investment advisory and property management fees are recognized when earned under the provisions of the related agreements. Development fees are recognized as the real estate development services are rendered, using the percentage-of-completion method of accounting.

Allowances for uncollectible current tenant receivables and unbilled deferred rents receivable. Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for estimated uncollectible tenant receivables and unbilled deferred rent. Our determination of the adequacy of these allowances requires significant judgments and estimates. Unbilled deferred rents receivable represents the amount that the cumulative straight-line rental revenue recorded to date exceeds cash rents billed to date under the lease agreements. Given the longer-term nature of these types of receivables, our determination of the adequacy of the allowance for unbilled deferred rents receivables is based primarily on historical loss experience. We evaluate the allowance for unbilled deferred rents receivable using a specific identification methodology for our company’s significant tenants, assessing a tenant’s financial condition and the tenant’s ability to meet its lease obligations. In addition, the allowance includes a reserve based upon our historical experience and current and anticipated future economic conditions that are not associated with any specific tenant.

Depreciable lives of leasing costs. We incur certain capital costs in connection with leasing our properties. These costs consist primarily of lease commissions and tenant improvements. Lease costs are amortized on the straight-line method over the shorter of the estimated useful life of the asset or the estimated remaining term of the lease, ranging from one to 15 years. We reevaluate the remaining useful life of these costs as the

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creditworthiness of our tenants changes. If we determine that the estimated remaining life of the respective lease has changed, we adjust the amortization period and, therefore, the amortization or depreciation expense recorded each period may fluctuate. If we experience increased levels of amortization or depreciation expense due to changes in the estimated useful lives of leasing costs, our results of operations may be adversely affected.

Factors That May Influence Future Results of Operations

The following is a summary of the more significant factors we believe may affect our results of operations. For a more detailed discussion regarding the factors that you should consider before making a decision to acquire shares of our common stock, see the information under the caption “Risk Factors” elsewhere in this report.

Rental income. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space, to lease currently available space as well as space in newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in the submarkets where our properties are located.

City of Los Angeles and Philadelphia Central Business Districts—Submarket Information. A significant portion of our income is derived from properties located in the Los Angeles and Philadelphia central business districts. The market conditions in these submarkets have a significant impact on our results of operations.

Information regarding significant tenants—Conrail. Currently, our largest tenant portfolio wide is Conrail. Conrail leased 752,999 rentable square feet of office space in Two Commerce Square as of December 31, 2004. This lease represents 58.2% of our total annual rental and tenant reimbursements revenues for the year ended December 31, 2004. The lease has staggered expirations, with 375,000 square feet expiring in 2008 and the remaining 377,999 square feet expiring in 2009. We have entered into leases with tenants currently subleasing this space covering 93,000 square feet commencing 2008, and 289,000 square feet commencing 2009. Of the leases commencing 2008 and 2009, 145,000 of the leased square feet will expire between 2009 and 2010. The remaining 237,000 square feet will expire in two terms, with 10% of the subleased square feet expiring in 2013 and 90% expiring in 2015. The lease expiring in 2015 has an early termination option in 2010. Because of these direct leases, we believe we have mitigated some of the risks associated with the Conrail tenant concentration. If we are unable to lease the remaining portion of the space currently leased by Conrail in Two Commerce Square prior to the expiration of the lease and assuming all subtenants to the Conrail lease exercise no renewal options and exercise all early termination options, our rental revenue (excluding tenant reimbursements revenue) computed on a GAAP basis would decrease by $3.9 million in 2008 as compared to 2007, $4.8 million in 2009 as compared to 2008, $6.9 million in 2010 as compared to 2009 and $2.1 million in 2011 as compared to 2010.

Development and redevelopment activities. We believe that our development activities present growth opportunities for us over the next several years. We continually evaluate the size, timing and scope of our development and redevelopment initiatives and, as necessary, sales activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. However, we may not be able to lease committed development or redevelopment properties at expected rental rates or within projected time frames or complete projects on schedule or within budgeted amounts. The occurrence of one or more of these events could adversely affect our financial condition, results of operations and cash flows. We currently have three significant development projects in various stages of planning and pre-development, and our joint venture with CalSTRS has one significant redevelopment project underway. As of December 31, 2004, we had incurred, on a consolidated basis, approximately $30.6 million in costs related to the three development projects, including $1.1 million that had been invested by the minority partner in Campus El Segundo. To the extent that we, or joint ventures we are a partner in, do not proceed with these projects as planned, those costs would need to be evaluated for impairment.

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Results of Operations

The results of operations reflect the consolidation/combination of the affiliates that own One Commerce Square (beginning June 1, 2004), Two Commerce Square, 2101 Market Street, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and real estate development operations. One Commerce Square (through May 31, 2004), 2121 Market Street (for all periods presented), City National Plaza (as of January 28, 2003, the date of acquisition), and Reflections I and II (as of October 13, 2004, the date of acquisition) are accounted for using the equity method of accounting.

Comparison of the year ended December 31, 2004 to the year ended December 31, 2003.

Total Revenues. Total revenues increased by $11.5 million, or 25.0%, to $57.8 million for the year ended December 31, 2004 compared to $46.3 million for the year ended December 31, 2003. The significant components of revenue are discussed below.

Rental revenues. Rental revenue increased by $7.6 million, or 37.0%, to $28.0 million for the year ended December 31, 2004 compared to $20.4 million for the year ended December 31, 2003. This increase is primarily a result of the inclusion of $7.7 million in revenue for the year ended December 31, 2004 due to the combination of the operating results of One Commerce Square as of June 1, 2004. This increase is partially offset by a decrease in rental revenue due to the modification of one tenant’s lease at Two Commerce Square on July 15, 2003. In the lease modification, the tenant was released from its obligation related to one floor that it no longer occupied. In exchange, the tenant committed to extend the term of the lease for an additional six years for the remaining occupied space, through December 31, 2013.

Tenant reimbursements. Revenues from tenant reimbursements increased by $4.7 million, or 46.8%, to $14.6 million for the year ended December 31, 2004 compared to $9.9 million for the year ended December 31, 2003. This increase was primarily a result of the inclusion of $4.7 million in tenant reimbursements for the year ended December 31, 2004 due to the combination of the operating results of One Commerce Square as of June 1, 2004.

Parking and other revenues. Revenues from parking and other increased by $1.2 million, or 58.3%, to $3.3 million for the year ended December 31, 2004 compared to $2.1 million for the year ended December 31, 2003. This increase was primarily as a result of the inclusion of $1.0 million in parking and other revenues for the year ended December 31, 2004 due to the combination of the operating results of One Commerce Square as of June 1, 2004, and an increase of $237,000 in interest income earned from the remaining cash from the Offering. These increases were offset by a decrease of approximately $131,000 in parking revenue at 2101 Market Street due to the allocation of certain parking spaces to accommodate a new retail tenant, which opened for operations in September 2003, at the adjacent 2121 Market Street property.

Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services decreased by $2.3 million, or 26.1%, to $6.5 million for the year ended December 31, 2004 compared to $8.8 million for the year ended December 31, 2003. This decrease was primarily a result of $3.1 million of incentive fees we earned during the year ended December 31, 2003 under our agreement with the City of Sacramento for managing the development of the CalEPA headquarters building, with no corresponding revenue during the year ended December 31, 2004. All development fees were earned from CalEPA as of June 30, 2003. The decrease was also attributable to acquisition incentive fees of $307,000 and $199,000 during the year ended December 31, 2003 related to 1835 Market Street and Valencia Town Center, respectively, with no revenue in the corresponding current period. These decreases were offset by an increase of $197,000 in investment advisory and management fees, primarily relating to management services to Pacific Financial Plaza beginning on July 1, 2003, an increase in leasing commissions of $697,000 related to 1835 Market Street, Pacific Financial Plaza, and other unaffiliated properties, and an increase of $325,000 in reimbursed compensation costs related to our property management staff at various properties.

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Investment advisory, management, leasing and development services revenues—unconsolidated/uncombined real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. The portion of the revenues represented by our ownership interest has been eliminated. Revenues from these services for unconsolidated/uncombined real estate entities increased by $442,000, or 8.8%, to $5.5 million for the year ended December 31, 2004 compared to $5.0 million for the year ended December 31, 2003. This increase was primarily a result of fee income related to City National Plaza. We began providing investment advisory and property management services to City National Plaza effective January 28, 2003, upon acquisition of our interest in this property. In addition, on October 13, 2004, we increased our ownership interest in City National Plaza from 4.3% to 21.3%, which had the effect of reducing the investment advisory, management, leasing and development services revenue recognized by us. Fees from construction management and leasing commissions at City National Plaza increased $260,000 and $1.2 million, respectively, during the year ended December 31, 2004, as compared to the year ended December 31, 2003. In addition, investment advisory and management fees related to City National Plaza increased $156,000 during the year ended December 31, 2004. This increase was offset by a one-time acquisition fee of $957,000 in the first quarter of 2003 relating to City National Plaza, and by a decrease of $246,000 in investment advisory, property management and leasing services related to One Commerce Square due to the combination of the operating results of One Commerce Square as of June 1, 2004, and the resulting elimination of these intercompany revenues.

Total Expenses. Total expenses increased by $14.5 million, or 30.3%, to $62.2 million for the year ended December 31, 2004 compared to $47.7 million for the year ended December 31, 2003. The significant components of expense are discussed below.

Rental property operating and maintenance expense. Rental property operating and maintenance expense increased by $4.2 million, or 57.3%, to $11.4 million for the year ended December 31, 2004 as compared to $7.2 million for the year ended December 31, 2003, primarily due to the combination of the operating results of One Commerce Square as of June 1, 2004, which represented expenses of $4.0 million.

Real estate taxes. Real estate tax expense increased by $1.7 million, or 52.7%, to $5.0 million for the year ended December 31, 2004 compared to $3.3 million for the year ended December 31, 2003. This increase is primarily a result of the inclusion of $1.7 million in real estate taxes for the year ended December 31, 2004 due to the combination of the operating results of One Commerce Square as of June 1, 2004.

Investment advisory, management, leasing and development services expenses. Expenses for these services increased $899,000 or 9.2%, to $10.7 million for the year ended December 31, 2004 compared to $9.8 million for the year ended December 31, 2003. This increase was primarily due to an increase in compensation costs including salaries, accrued bonus, 401k profit sharing and retirement savings plan expenses and temporary help costs totaling approximately $1.8 million due to an increase in the number of non-reimbursed personnel resulting from an increase in our business activity. The increase was also due to an increase of $436,000 in compensation costs related to our property management staff at various properties, and an increase in business taxes levied by the City of Philadelphia. These increases were offset by incentive compensation payments of approximately $1.5 million during 2003, related to the completed development of the CalEPA headquarters building, with no similar expense in the corresponding current period.

Interest expense. Interest expense increased by $2.9 million or 13.8% to $24.3 million for the year ended December 31, 2004 compared to $21.4 million for the year ended December 31, 2003. This increase is primarily a result of the inclusion of $3.6 million in interest expense for the year ended December 31, 2004 due to the combination of the operating results of One Commerce Square as of June 1, 2004. This increase was offset by a decrease in the amortization of deferred loan costs during the year ended December 31, 2004, as compared to the year ended December 31, 2003, resulting from the write-off of unamortized loan costs associated with the refinancing of the debt obligations of Two Commerce Square in 2003.

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Depreciation and amortization expense. Depreciation and amortization expense increased by $3.0 million, or 52.2%, to $8.8 million for the year ended December 31, 2004 compared to $5.8 million for the year ended December 31, 2003. This increase was primarily the result of the inclusion of $3.0 million in depreciation and amortization expense for the year ended December 31, 2004 resulting from the combination of One Commerce Square effective June 1, 2004.

General and administrative expense. General and administrative expense was $1.7 million for the year ended December 31, 2004, which represents the incremental salaries and employment related costs and incremental overhead of becoming a public company on October 13, 2004.

Gain on sale of real estate. Gain on sale of real estate was $975,000 for the year ended December 31, 2004 due to the sale of a parcel of development property at our Four Points Centre project in Austin, Texas, which was sold to an unaffiliated third party in the first quarter of 2004. There were no land sales for the year ended December 31, 2003.

Equity in net loss of unconsolidated/uncombined real estate entities. Equity in net loss of unconsolidated/uncombined real estate entities increased by $999,000, or 91.8%, to a net loss of $2.1 million for the year ended December 31, 2004 compared to a net loss of $1.1 million for the year ended December 31, 2003. Set forth below is a summary of the condensed financial information for the unconsolidated/uncombined real estate entities, consisting of One Commerce Square (through May 31, 2004), 2121 Market Street, City National Plaza (beginning January 28, 2003), and Reflections I and II (beginning October 13, 2004), and our share of net loss and equity in net loss for the years ended December 31, 2004 and 2003 (in thousands):

Aggregate revenue attributable to, and operating and other expenses for unconsolidated/uncombined real estate entities for the year ended December 31, 2004 compared to the year ended December 31, 2003 decreased due to the consolidation/combination of One Commerce Square in our financial statements effective June 1, 2004. As a result, there were five months of revenue and expenses in the year ended December 31, 2004 for One Commerce Square compared to a full year of operations in the year ended December 31, 2003. This decrease was offset by the acquisition of our interests in City National Plaza on January 28, 2003 and Reflections I and II on October 12, 2004.

Aggregate interest expense decreased by $209,000, or 1.4%, to $14.3 million for the year ended December 31, 2004 compared to $14.5 million for the year ended December 31, 2003 primarily due to a decrease of $3.4 million due to the combination of One Commerce Square effective June 1, 2004, offset by an increase of $3.2 million relating to the refinancing of City National Plaza.

Aggregate depreciation and amortization expense decreased by $940,000, or 7.3%, to $11.9 million for the year ended December 31, 2004 compared to $12.8 million for the year ended December 31, 2003. This decrease was primarily due a decrease of $2.8 million due to the combination of One Commerce Square effective June 1, 2004. This decrease was offset by the acquisition of our interest in City National Plaza in January 2003, resulting in additional depreciation and amortization expense of $1.6 million, and the acquisition of our interest in Reflections I and II in October 2004, resulting in additional depreciation and amortization expense of $285,000.

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Comparison of year ended December 31, 2003 to year ended December 31, 2002

Total revenues. Total revenues increased by $7.6 million, or 19.6%, to $46.3 million for the year ended December 31, 2003 compared to $38.7 million for the year ended December 31, 2002. The significant components of revenue are discussed below.

Rental revenues. Rental revenue decreased by $77,000, or 0.4%, to $20.4 million for the year ended December 31, 2003 compared to $20.5 million for the year ended December 31, 2002. This decrease is primarily due to the modification of one tenant’s lease at Two Commerce Square. In the lease modification, the tenant was released from its obligation related to one floor that it no longer occupied. In exchange, the tenant committed to extend the term of the lease for an additional six years for the remaining space, through September 30, 2013.

Tenant reimbursements. Revenues from tenant reimbursements increased by $315,000, or 3.3%, to $9.9 million for the year ended December 31, 2003 compared to $9.6 million for the year ended December 31, 2002. The increase was principally a result of increases in property insurance premiums and City of Philadelphia gross receipts taxes that were passed through to the tenants under their lease terms.

Parking and other revenues. Parking and other revenues decreased slightly to $2.1 million for the year ended December 31, 2003 compared to the year ended December 31, 2002. This decrease was primarily as a result of a slight decrease in other revenues.

Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services increased by $3.7 million, or 72.9%, to $8.8 million for the year ended December 31, 2003 compared to $5.1 million for the year ended December 31, 2002. This increase was primarily a result of fee income related to three properties: Pacific Financial Plaza, 1835 Market Street and CalEPA. We began providing investment advisory and property management services to Pacific Financial Plaza effective July 1, 2003, resulting in additional fee income of $408,000 for the year ended December 31, 2003. Fee income related to investment advisory and property management services related to 1835 Market Street increased by $410,000 due to an acquisition incentive fee of $307,000, as well as this property being under our management for a full year in 2003 compared to seven months in 2002. We do not expect to earn any additional incentive fees from the CalSTRS separate account properties. In 2003, leasing commission revenue increased by $391,000 and $370,000 for 1835 Market Street and properties owned by third parties, respectively. Additionally, revenue from development fees increased by $2.1 million for the year ended December 31, 2003 as compared to the year ended December 31, 2002 as a result of incentive fees we earned under our agreement with the City of Sacramento for managing the development of the CalEPA headquarters building. All development fees have been earned and collected from CalEPA as of December 31, 2003.

Investment advisory, management, leasing and development services revenues—uncombined real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. The portion of the revenues represented by our ownership interest has been eliminated. Revenues from these services for uncombined real estate entities increased by $3.7 million, or 278.1%, to $5.0 million for the year ended December 31, 2003 compared to $1.3 million for the year ended December 31, 2002. This increase was primarily a result of fee income related to City National Plaza. We began providing investment advisory and property management services to City National Plaza effective January 28, 2003, upon acquisition of our interest in this property. In 2003, our services to City National Plaza resulted in additional fee income of $4.5 million, including a one-time acquisition fee of $957,000 and leasing commissions of $858,000. These increases were offset by a decrease of $618,000 in leasing commission revenue at One Commerce Square due to less leasing activity at this property during 2003, and a decrease of $128,000 in property management fees at One Commerce Square due to one significant lease at an above current market rate expiring in September 2002, which resulted in lower property revenues in 2003.

Total expenses. Total expenses increased by $4.4 million, or 10.3%, to $47.7 million for the year ended December 31, 2003 compared to $43.3 million for the year ended December 31, 2002. The significant components of expense are discussed below.

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Rental property operating and maintenance expense. Rental property operating and maintenance expense increased by $778,000, or 12.1%, to $7.2 million for the year ended December 31, 2003 as compared to $6.4 million for the year ended December 31, 2002, primarily as a result of increased property insurance premiums and net profits taxes levied by the City of Philadelphia. Tenant reimbursements revenue increased 3.3% as compared to a 12.2% increase in rental property operating and maintenance expense due to increased costs for leasing, advertising and marketing, certain professional services, parking, bad debt expense and net profit taxes, which expenses are not allowable pass-through costs under standard lease agreements.

Real estate taxes. Real estate taxes increased by $66,000, or 2.0%, to $3.3 million for the year ended December 31, 2003 compared to $3.2 million for the year ended December 31, 2002, primarily as a result of increased gross receipts taxes paid to the City of Philadelphia.

Investment advisory, management, leasing and development services expenses. Expenses for these services increased by $3.6 million, or 57.0%, to $9.8 million for the year ended December 31, 2003 compared to $6.2 million for the year ended December 31, 2002. This increase was primarily a result of (a) an increase in compensation costs principally due to additional management staff at City National Plaza and Pacific Financial Plaza, which we did not manage in 2002, and at 1835 Market Street, which was under our management for seven months in 2002 compared to a full year in 2003, (b) higher incentive compensation payments related to the completed development of the CalEPA headquarters building, and (c) commissions paid to in-house brokers related to increased leasing activity. Additionally, we incurred moving expenses associated with our corporate office relocation and higher liability insurance premiums.

Rent—uncombined real estate entities. Rent expense related to uncombined real estate entities increased by $152,000, or 150.5%, to $253,000 for the year ended December 31, 2003 compared to $101,000 for the year ended December 31, 2002. This increase was primarily a result of our corporate office rent paid to City National Plaza. In 2002, our corporate office was located in a building owned by an unaffiliated third party. Therefore, the corresponding expense for 2002 of $160,000 is included in the investment advisory, management, leasing and development services expenses for that period.

Interest expense. Interest expense increased by $1,000 to $21.4 million for the year ended December 31, 2003 compared to the year ended December 31, 2002. Interest expense remained consistent between 2003 and 2002.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $84,000, or 1.4%, to $5.8 million for the year ended December 31, 2003 compared to $5.9 million for the year ended December 31, 2002. This decrease was primarily a result of certain assets at Two Commerce Square that became fully depreciated during 2002 and 2003.

Equity in net (loss) income of uncombined real estate entities. Equity in net (loss) income of uncombined real estate entities decreased by $2.1 million to a net loss of $1.1 million for the year ended December 31, 2003 compared to income of $993,000 for the year ended December 31, 2002. Set forth below is a summary of the condensed financial information for the uncombined real estate entities, consisting of One Commerce Square, 2121 Market Street and City National Plaza, and our share of net (loss) income and equity in net (loss) income for the years ended December 31, 2003 and 2002 (in thousands):

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Aggregate revenue and operating and other expenses for uncombined real estate entities for the year ended December 31, 2003 compared to the year ended December 31, 2002 increased significantly due to the acquisition of our interest in City National Plaza on January 28, 2003, offset by a decrease in rental revenue at One Commerce Square due to the scheduled expiration of a significant lease in September 2002 with rental rates above current market rates. Aggregate interest expense increased by $7.7 million, or 113.1%, to $14.5 million for the year ended December 31, 2003 compared to $6.8 million for the year ended December 31, 2002 primarily as a result of interest on the financing for our acquisition of City National Plaza. Aggregate depreciation and amortization expense increased by $7.0 million, or 121.3%, to $12.8 million for the year ended December 31, 2003 compared to $5.8 million for the year ended December 31, 2002 primarily as a result of the acquisition of our interest in City National Plaza in January 2003.

Liquidity and Capital Resources

Analysis of liquidity and capital resources

We utilized a portion of the net proceeds from the Offering to acquire a 25% interest in Reflections I and Reflections II for a total of $11.8 million, increase our indirect ownership interest in City National Plaza from 4.3% to 21.3% for a payment of $21 million, acquire the 50% interest in One Commerce Square owned by an unaffiliated third party for a purchase price of $24 million, plus the assumption of approximately $10 million of debt principal and interest repayment obligations, repay aggregate indebtedness of $10.7 million relating to One Commerce Square, redeem preferred equity interests related to One Commerce Square held by an unaffiliated mezzanine debt lender on the property for $11.7 million, and fund a required property level reserve of $2.1 million.

We intend to use the remaining net proceeds of the Offering to repay principal of $9.2 million on the mezzanine loan on One Commerce Square when this loan becomes prepayable in April 2005, fund development costs associated with our development properties, and partially fund our co-investment obligation to our joint venture with CalSTRS or other future property acquisitions.

Our joint venture with CalSTRS also intends to obtain financing of approximately $31.8 million relating to the Reflections I and Reflections II properties, of which $7.9 million will be distributed to us. The financing is expected to mature in 10 years, bearing interest at a fixed rate of 5.22%.

Our management believes that our company will have sufficient capital to satisfy our liquidity needs over the next 12 months through working capital and net cash provided by operations. We expect to meet our long-term liquidity requirements, including property and undeveloped land acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, the issuance of common units of our Operating Partnership, and the potential issuance of additional debt or equity securities. We do not currently anticipate issuing any additional equity securities either of our company or our Operating Partnership other than pursuant to our equity incentive plan. We also do not intend to reserve funds to retire existing debt upon maturity, except as described in the paragraph above in relation to the mezzanine loan on One Commerce Square. We will instead seek to refinance this debt at maturity or retire the long-term debt through the issuance of equity securities, as market conditions permit.

As of December 31, 2004, we have an unfunded capital commitment to our joint venture with CalSTRS of $57.6 million. In March 2005, the joint venture acquired four properties in suburban Philadelphia, which reduced our unfunded capital commitment to $47.5 million. Our requirement to fund all or a portion of this commitment is subject to our identifying properties to acquire that are mutually acceptable to us and CalSTRS.

We intend to declare and pay annual dividends on our common stock. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. Both of our consolidated operating properties, One Commerce Square and Two Commerce Square, are subject to debt financing covenants containing lock-box

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arrangements. For One Commerce Square, funds generated by the property can only be distributed to us after payment of property level debt and operating expenditures. As a result, there is limited cash available from One Commerce Square for distribution to us. Funds generated by Two Commerce Square cannot be distributed to us under the terms of the lock-box arrangements established for the existing lenders for the property. In addition, our joint venture with CalSTRS is subject to debt financing with a lockbox arrangement. With respect to our joint venture properties, we do not control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us.

Development and Redevelopment Projects

We currently own interests in three development projects and our joint venture with CalSTRS has one significant redevelopment project. We have considerable expertise in the completion of large-scale development and redevelopment projects. We anticipate developing these properties as market feasibility permits. We also anticipate seeking to mitigate development risk, by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. There can be no assurance we will be able to successfully implement these risk mitigation measures.

The amount and timing of costs associated with our development and redevelopment projects is inherently uncertain due to market and economic conditions. We presently intend to fund development and redevelopment expenditures primarily through construction or refurbishment financing. In July 2004 a parent of the entity that owns City National Plaza refinanced the loan for City National Plaza, our sole significant redevelopment project at this time, which provides proceeds to cover the estimated future redevelopment costs. Presently, we have not obtained construction financing for these three development projects. If we finance the development projects through construction loans and are unable to obtain permanent financing on advantageous terms or at all, we would need to fund these obligations from cash flow from operations or seek alternative capital sources. If unsuccessful, this could adversely impact our financial condition and results of operations and impair our ability to satisfy our debt service obligations. If we are successful in obtaining construction or refurbishment financing and permanent financing, we anticipate that the corresponding interest costs would represent both a significant use of our cash flow, and a material component of our results of operations.

Leasing, Tenant Improvement and Capital Needs

In addition to our development and redevelopment projects, our company also owns majority interests in One Commerce Square and Two Commerce Square. These properties are substantially leased and have significant stabilized cash flows. These properties require routine capital maintenance in the ordinary course of business. The properties also require that we incur expenses for leasing commissions and tenant improvement costs on an annual basis. The level of these expenses varies from year to year based on several factors, including lease expirations. Based upon historical expenditure levels, the leasing activity in the project and the current rent roll, we anticipate incurring expenses of approximately $8.2 million in capital improvements, tenant improvements, and leasing costs for the One Commerce Square and Two Commerce Square properties collectively during the year ending December 31, 2005. We do not anticipate incurring significant expenses for leasing costs, tenant improvements and capital improvements for Reflections I and Reflections II as these properties are each 100% leased to a sole tenant.

Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall market conditions.

Contractual Obligations

The following table provides information for our company with respect to the maturities and scheduled repayments of secured debt (which reflects the entire principal amount of our fixed and variable rate debt) and

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scheduled interest payments of fixed and variable rate debt as of December 31, 2004 (in thousands). The following table also provides information with respect to capital expenditure commitments as of December 31, 2004 as well as future minimum lease payments on our long-term operating lease for our corporate offices at City National Plaza. The table does not reflect available maturity extension options.

Capital commitments of our company and our consolidated subsidiaries include approximately $3.8 million of tenant improvement allowances and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square. In addition, we have an unfunded capital commitment of $57.6 million to our joint venture with CalSTRS. This unfunded commitment is subject to the approval of both our company and CalSTRS to acquire properties not yet identified or other cash uses. As the identification, approval and successful closing of such acquisitions is uncertain, the timing and amount of capital to be contributed is not known. We estimate, however, that we will fund $52.1 million in 2005, and the remainder in 2006. Additionally, we entered into a joint venture agreement with Weingarten Realty Investors during 2004. Pursuant to this joint venture agreement, we will contribute initial capital of $125,000 in 2005, which has been included in the capital commitments below:

Capital commitments of at least $20 million required under leases entered into at City National Plaza by City National Bank, Jones Day, and Fulbright & Jaworski are not included in the contractual obligations table above as City National Plaza is an unconsolidated subsidiary. These capital expenditures must be completed by December 31, 2006 under the Jones Day lease and by December 31, 2008 under the City National Bank and Fulbright & Jaworski leases.

Off-Balance Sheet Arrangements—Indebtedness of Unconsolidated Real Estate Entities

As of December 31, 2004, our company had investments in entities owning four unconsolidated properties with stated ownership percentages ranging from 21.3% to 50.0%. We do not have control of these entities, and none of the entities are considered variable interest entities. Therefore, we account for them using the equity method of accounting. The table below summarizes the outstanding debt for the two properties with outstanding debt as of December 31, 2004 (in thousands):