UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

or

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

For the transition period from                      to                     

Commission file number: 1-13589

PRIME GROUP REALTY TRUST

(Exact name of registrant as specified in its charter)

Maryland		36-4173047
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
330 North Wabash Avenue, Suite 2800,
Chicago, Illinois		60611
(Address of principal executive offices)		(Zip Code)

(312) 917-1300
(Registrant’s telephone number, including area code)

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

Title of each class		Name of each exchange on which registered
Series B — Cumulative Redeemable		New York Stock Exchange
Preferred Shares of Beneficial Interest,
$0.01 par value per share

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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

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

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer þ		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

The aggregate market value of the registrant’s common shares held by non-affiliates as of June 30, 2009 was $0 as the common shares were de-listed from the New York Stock Exchange as a result of our acquisition by an affiliate of The Lightstone Group, LLC.

The number of the registrant’s common shares outstanding was 236,483 as of April 1, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

INDEX

		PAGE
PART I
Item 1. Business			4
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			25
Item 2. Properties			25
Item 3. Legal Proceedings			27
Item 4. Removed and Reserved			28
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			29
Item 6. Selected Financial Data			31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			51
Item 8. Financial Statements and Supplementary Data			51
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			51
Item 9A. Controls and Procedures			52
Item 9B. Other Information			52
PART III
Item 10. Directors and Executive Officers of the Registrant			53
Item 11. Executive Compensation			59
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			66
Item 13. Certain Relationships and Related Transactions			67
Item 14. Principal Accountant Fees and Services			68
PART IV
Item 15. Exhibits and Financial Statement Schedules			69
Signatures			80
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

Forward-Looking Statements contained in this Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management’s current view with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated, and include but are not limited to, the effects of future events on our financial performance; risks associated with our high level of indebtedness and our ability to refinance our indebtedness as it becomes due; the risk that we or our subsidiaries will not be able to satisfy scheduled debt service obligations or will not remain in compliance with existing loan covenants; the effects of future events, including tenant bankruptcies and defaults; risks associated with conflicts of interest that exist with certain members of our board of trustees (“Board”) as a result of such members’ affiliation with our sole common shareholder; the risks related to the office and, to a lesser extent, industrial markets in which our properties compete, including the adverse impact of external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; the risk of potential increase in market interest rates from current rates; and risks associated with real estate ownership, such as the potential adverse impact of changes, in the local, economic climate on the revenues and the value of our properties as well as our tenants and vendors operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of December 31, 2009.

Among the matters about which we have made assumptions are the following:

•

future economic and market conditions which may impact the demand for office and industrial space either at current or increased levels;

•

the extent of any tenant bankruptcies or defaults that may occur;

•

our ability or inability to renew existing tenant leases and lease up vacant space;

•

prevailing interest rates;

•

the effect of inflation and other factors on operating expenses and real estate taxes;

•

our ability to minimize various expenses as a percentage of our revenues; and

•

the availability of financing and capital.

In addition, historical results and percentage relationships set forth in this Annual Report on Form 10-K are not necessarily indicative of future operations.

PART I

ITEM 1. BUSINESS

Background and General

We are a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”) which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in metropolitan Chicago. As of December 31, 2009, our portfolio of properties consists of 8 office properties, containing an aggregate of 3.3 million net rentable square feet (see the “Properties” section for detailed information concerning the individual properties). In addition, we have a joint venture interest in one office property located in Phoenix, Arizona containing an aggregate of 101,000 net rentable square feet which is accounted for as an investment in unconsolidated joint venture under the equity method of accounting. We lease and manage 3.3 million square feet comprising all of our wholly–owned properties. We are also the asset and development manager for an approximately 1.1 million square foot office building located at 1407 Broadway Avenue in New York, New York, which is owned by affiliates of Lightstone, although we are currently scheduled to cease performing these services effective April 4, 2010.

We were organized in Maryland on July 21, 1997 as a REIT under the Internal Revenue Code of 1986, as amended (“the Code”), for federal income tax purposes. On November 17, 1997, we completed our initial public offering and contributed the net proceeds to Prime Group Realty, L.P. (our “Operating Partnership”) in exchange for common and preferred partnership interests.

Prior to our acquisition (the “Acquisition”) by an affiliate of The Lightstone Group, LLC (“Lightstone”), we were the sole general partner of the Operating Partnership and owned all of the preferred units and 88.5% of the common units of the Operating Partnership then issued. Each preferred unit and common unit entitled the owners thereof to receive distributions from our Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares are based upon the distributions received by us with respect to the common units and preferred units we own in the Operating Partnership.

On June 28, 2005, our common shareholders approved the Acquisition by Lightstone and on July 1, 2005, the Acquisition was completed. The Acquisition closed pursuant to the terms of the previously announced agreement and plan of merger dated as of February 17, 2005, among certain affiliates of Lightstone, the Operating Partnership and us. As a result of the Acquisition, each of our common shares and limited partnership units of the Operating Partnership were cancelled and converted into the right to receive cash in the amount of $7.25 per common share or unit, without interest. In connection with the Acquisition, all outstanding options with an exercise price equal to or greater than the sales price of $7.25 per share/unit were cancelled and each outstanding option for a common share with an exercise price less than the sales price was entitled to be exchanged for cash in an amount equal to the difference between $7.25 and the exercise price. Our Series B Cumulative Redeemable Preferred Shares (the “Series B Shares”) remain outstanding after the completion of the Acquisition and continue to be publicly traded on the New York Stock Exchange (“NYSE”).

On January 11, 2010, we announced our intention to delist the Series B Shares from the NYSE and remove the Series B Shares from registration under the Securities and Exchange Act of 1934, as amended. We expect to voluntarily cease trading on the NYSE. After voluntarily delisting the Series B Shares from the NYSE, we expect that the trading of the Series B Shares will be reported in the Pink Sheets with Pink OTC Markets Inc. We also expect to subsequently file a Form 15 with the SEC to deregister the Series B Shares under Sections 12(b) and 12(g) of the Exchange Act, and to suspend the reporting obligations under Section 15(d) of the Exchange Act. These actions are consistent with our previous disclosures and our obligations under the Agreement and Plan of Merger (the “Merger Agreement”) relating to the July 2005 Acquisition of our common shares. Upon filing for deregistration with the SEC, we will become a voluntary filer of our reports under the Exchange Act through June 30, 2010 in accordance with our obligations under the Merger Agreement. Our Board of Trustees has approved the delisting from the NYSE and deregistration of the Series B Shares under the Exchange Act in order to save significant costs associated with compliance with these regulatory provisions.

As a result of the Acquisition, Prime Office Company LLC (“Prime Office”), a subsidiary of Lightstone, owns 100.0%, or 236,483, common shares and 99.1%, or 26,488,389, of the outstanding common units in the Operating Partnership. Prime Group Realty Trust (the “Company” or “PGRT”) owns 0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred units in the Operating Partnership, and remains the sole general partner of the Operating Partnership and thus consolidates the Operating Partnership and its wholly-owned subsidiaries for financial reporting purposes.

We conduct substantially all of our business through the Operating Partnership and its subsidiaries. Certain services requested by our tenants, certain management and consulting contracts and certain build-to-suit construction activities are conducted through Prime Group Realty Services, Inc., a Maryland corporation and a wholly-owned subsidiary of the Operating Partnership, and its affiliates (collectively, the “Services Company”). Our executive offices are located at 330 North Wabash Avenue, Suite 2800, Chicago, Illinois 60611, and our telephone number is (312) 917-1300.

Tax Status

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, we will not be subject to federal income tax at the corporate level on our income as long as we distribute 90.0% of our taxable income (excluding any net capital gain) each year to our shareholders. Since our inception, we believe that we have complied with the tax rules and regulations to maintain our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we are subject to certain state and local taxes on our income and property. In addition, our Services Company’s income is subject to state and federal income taxation.

Business Strategy

Our business strategy is to operate our portfolio of properties to create the optimum level of service and value to our tenants, to retain our existing tenant base as their leases expire, to search for and identify prospective tenants for space in our properties which is unoccupied or is subject to expiring leases and to create maximum portfolio value for our shareholders.

Ongoing Operations. Our primary business is to focus on the operation, leasing and management of our existing real estate properties.

We strive to enhance our property-level net operating income and cash flow by:

•

engaging in pro-active leasing programs and effective property management;

•

managing operating expenses through the use of in-house management expertise;

•

maintaining and developing long-term relationships with a diverse tenant group;

•

attracting and retaining motivated employees by providing financial and other incentives; and

•

emphasizing value-added capital improvements to maintain and enhance our properties’ competitive advantages in their submarkets.

Liquidity and Capital Requirements. We require cash to pay our operating expenses, make capital expenditures, fund tenant improvements, pay leasing and redevelopment costs, pay dividends which are currently in arrears on our Series B Shares and service our debt and other short-term and long-term liabilities. Cash on hand and net cash provided from operations represent our primary sources of liquidity to fund these expenditures. In assessing our liquidity, key components include our net income, adjusted for non-cash and non-operating items, and current assets and liabilities, in particular accounts receivable, accounts payable and accrued expenses. For the longer term, our debt and long-term liabilities are also considered key to assessing our liquidity.

In order to qualify as a REIT for federal income tax purposes, we must distribute 90.0% of our taxable income (excluding capital gains) annually. See Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for more information regarding dividends on our common shares and on our Series B Shares.

For a discussion of recent transactions which may affect our liquidity and capital resources, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Recent Developments.

Our anticipated cash on hand (including restricted cash escrows) is expected to be sufficient to fund our anticipated short-term capital needs over the next twelve months. In 2010, we anticipate the need to fund significant capital expenditures to retenant and/or redevelop space that has been previously vacated, or is anticipated to be vacated, or renew leases which are expiring during the year. In order to fund these and our other short-term and long-term capital needs, we expect to utilize available funds from cash on hand and existing or future escrows with lenders. In addition, we may enter into capital transactions, which could include asset sales, refinancings and modifications or extensions of existing loans. There can be no assurances that any capital transactions will occur or, if they do occur, that they will yield adequate proceeds to fund our short-term or long-term capital needs or will be on terms favorable to us.

The financial covenants contained in some of our loan agreements and guarantee agreements with our lenders include minimum ratios for debt service coverage and other financial covenants. As of December 31, 2009, we were in compliance with the requirements of all of our financial covenants. On January 14, 2010, we received a notice of maturity date default from the special servicer of the non-recourse mortgage note on our Brush Hill property. The loan matured on January 1, 2010 and was not paid off. We are currently in the process of renegotiating the terms of a loan extension with the special servicer and the lender. A default on the Brush Hill property loan does not cause a default on any of the Company’s other loans.

On February 26, 2010, our two subsidiaries which own separate portions of our Continental Towers property notified the lender of the non-recourse mortgage notes on the Continental Towers property that they were each in default under the terms of their respective loan documents due to the property encumbered by one of the loans generating negative cash flows. On March 5, 2010, these two subsidiaries and the Operating Partnership received notices from the lender that the lender was accelerating the maturity date of the loans and demanding payment of all amounts due under the loans. We are currently in discussions with the lender on these loans regarding a potential deed in lieu of foreclosure transaction with the lender and other related matters. A default on the Continental Towers property loans does not cause a default on any of the Company’s other loans.

Given our current level of debt, limited availability of unencumbered collateral and our current financing arrangements, we may not be able to obtain additional debt financing or replacement financing at interest rates that are below the rates of current return on our properties.

Recent Developments

Dispositions. During the period from January 1, 2009 through December 31, 2009, we disposed the following operating property:

Net

Mortgage

Rentable

Sales Price

Debt

Month

Property

Location

Square Feet

(in millions)

(in millions)

Disposed

800-810 Jorie Boulevard (1)

Oak Brook, IL

193,688

N/A

$

21.3

July

Indebtedness. During 2009, we completed the following transactions with respect to our indebtedness:

Loan

Principal

Amount

Interest

Transaction

Maturity

Collateral

Type of Loan

(in millions)

Rate

Date

Date

Indebtedness Retirement

800-810 Jorie Boulevard (1)

First Mortgage

$

21.3

13.33

%

7/09

12/10

PGRT ESH, Inc./Citicorp

Non-recourse

$

80.0

Various

7/09

6/09

Loans (2)

Principal Payments

PGRT ESH, Inc./Citicorp Loan

Non-recourse

$

1.5

Various

Various

6/09

Amortization

Various

$

1.8

Various

Various

Various

Total interest paid on mortgage notes payable was $26.1 million for the year ended December 31, 2009, $33.6 million for the year ended December 31, 2008 and $38.6 million for the year ended December 31, 2007. No capitalization of interest occurred in the years ended December 31, 2009, 2008 and 2007.

Shareholders and Board of Trustees Developments. On July 9, 2009, we held our Annual Meeting of Shareholders, at which all of our existing Board Members were re-elected for additional one-year terms. Our Board consists of (i) Messrs. David Lichtenstein, the Chairman and Principal of Lightstone, Jeffrey Patterson, our President and Chief Executive Officer, Peyton Owen, Jr. the President and Chief Operating Officer of Lightstone, and Bruno de Vinck, a Senior Vice President of Lightstone, each of whom were re-elected as non-independent trustees, and (ii) Messrs. George R. Whittemore, John M. Sabin, and Shawn R. Tominus, each of whom were re-elected as independent trustees. Mr. Whittemore is the Chairman of our audit committee and Messrs. Whittemore and Sabin were each named as “financial experts” of our audit committee.

Competition

We compete with many other owners and developers of office and industrial real estate, some of which may have greater financial and marketing resources or expertise. In addition, the amount of available space in competitive properties in any particular market or submarket in which our properties are located could have a material adverse effect on both our ability to lease space and on the rents charged at our properties.

Services Company

We provide certain services requested by tenants through our Services Company. As a taxable REIT subsidiary, our Services Company can provide services to tenants of our properties, even if these services are not considered services customarily furnished in connection with the rental of real estate property, without causing the rental income from the properties to be treated as other than rents from real property by the Internal Revenue Service under the Code.

Government Regulations

Environmental Matters. Phase I or similar environmental assessments have been performed by independent environmental consultants on all of our properties. Phase I assessments are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations.

In November 2001, at the request of the Department of the Army of the United States of America (the “DOA”), we granted the DOA a right of entry for environmental assessment and response in connection with our property known as the Atrium located at 280 Shuman Boulevard in Naperville, Illinois. The DOA informed us that the property was located north of a former Nike missile base and that the DOA was investigating whether certain regional contamination of the groundwater by trichloethene (“TCE”) emanated from the base and whether the DOA would be required to restore the environmental integrity of the region under the Defense Environmental Restoration Program for Formerly Used Defense Sites. In December 2001, the results from the tests of the groundwater from the site indicated elevated levels of TCE. It is currently our understanding based on information provided by the DOA and an analysis prepared by its environmental consultants that (i) the source of the TCE contamination did not result from the past or current activities on the Atrium property, and (ii) the TCE contamination is a regional problem that is not confined to the Atrium. Our environmental consultants have advised us that the United States Environmental Protection Agency (the “EPA”) has issued a Statement of Policy towards owners of property containing contaminated aquifers. According to this policy, it is the EPA’s position that where hazardous substances have come to be located on a property solely as a result of subsurface migration in an aquifer from an offsite source, the EPA will not take enforcement actions against the owner of the property. The groundwater underneath this property is relatively deep, and the property obtains its potable water supply from the City of Naperville and not from a groundwater well. Accordingly, we do not anticipate any material liability because of this TCE contamination.

Our 330 N. Wabash Avenue office property currently contains asbestos in the form of spray–on insulation located on the decking and beams of the building. We have been informed by our environmental consultants that the asbestos in 330 N. Wabash Avenue is being properly maintained and no remediation of the asbestos is necessary. However, we have in the past and we may in the future voluntarily decide to remove or otherwise remediate some or all of this asbestos in connection with the releasing and/or redevelopment of this property. Pursuant to the existing accounting rules, a conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, we are required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. We recorded an asset of $10.2 million, $8.7 million and $4.3 million and a liability related to asbestos abatement of $9.7 million, $7.8 million and $4.5 million as of December 31, 2009, 2008 and 2007, respectively.

We believe that our other properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. We have not been notified by any governmental authority, and are not otherwise aware of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our other properties. None of the environmental assessments of our properties have revealed any environmental liability that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any such material environmental liability. Nonetheless, it is possible that our assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of our properties (such as the presence of underground storage tanks) or by third parties unrelated to us. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds our budgets for such items, our financial condition could be further adversely affected.

Costs of Compliance with Americans with Disabilities Act of 1990 (the “ADA”). Under the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in the imposition of fines by the federal government or an award of damages to private litigants. We believe that our properties are substantially in compliance with these requirements; however, we may incur additional costs to fully comply with the ADA. Although we believe that such costs will not have a material adverse effect on our financial position, if required changes involve a greater amount of expenditures than we currently anticipate, our capital and operating resources could be adversely affected.

Other Regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in material compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require us to make significant unanticipated expenditures and could have an adverse effect on our net income and our capital and operating resources.

Insurance

In the regular course of our business, we maintain commercial general liability and all-risk property insurance with respect to our properties provided by reputable companies with commercially reasonable deductibles, limits and policy specifications customarily covered for similar properties. Our management believes that such insurance adequately covers our properties.

On April 30, 2009, we obtained new property insurance policies in combination with Lightstone’s overall insurance program for it and its affiliates consisting of (i) a primary property policy in the amount of $10.0 million covering risk of physical damage to the properties in our portfolio and (ii) several layers of excess property insurance in an aggregate amount of $540.0 million covering physical property damages to our properties in excess of our primary policy (the “excess policies”). Our primary policy and excess policies include insurance for acts of terrorism as a covered loss. We are at risk for financial loss, which could be material, relating to losses in excess of our policy limits. In addition, we are at risk under our insurance policies for losses of any amount relating to occurrences which are not covered by our insurance policies, such as occurrences excluded under the standard coverage exclusions such as acts of war, military action, nuclear hazards, governmental action, illegal acts of the insured and pollution, which in the event of such losses could be material.

Our primary policy and excess policies include coverage for flood and earthquake losses. In certain instances our policy sub-limits for these losses may be less than the value of specific properties. Our properties are not located in geographical areas typically subject to flood or earthquake losses. However, we may be at risk of financial losses resulting from losses that exceed these policy sub-limits.

We maintain liability insurance including but not limited to commercial general liability, auto liability, garage liability and commercial umbrella insurance (the “liability policies”) in amounts and limits that are similar to other property owners in geographic areas similar to that of our properties. Our liability policies include coverage for acts of terrorism as a covered loss. Additionally, we maintain workers compensation in compliance with statutory limits and requirements as well as employers liability insurance. These policies contain standard exclusions that are typical of liability insurance policies. We may be at financial risk for losses that exceed our limits of liability or which may be excluded from the insurance policies, which could be material.

In connection with the ownership of our properties, certain events may occur that would require us to expend funds for environmental remediation of some of our properties and adjacent properties. Certain environmental exposures are excluded from coverage under our insurance policies. Effective April 30, 2003, we obtained a pollution legal liability policy having a limit of $10.0 million, which we have renewed on an annual basis since then and which includes coverage for liability, third party property damage and remediation costs as a result of pollution conditions. Pre-existing pollution conditions are excluded from the policy and certain property locations may be excluded in the future by our insurers based on their ongoing due diligence as policies are renewed or replaced. Costs not covered under our pollution legal liability policy could be material, which could adversely affect our financial condition. We are unable to predict changes in future environmental laws and the financial impact we may incur as result of these changes.

Employees

As of December 31, 2009, we had 64 full-time employees. We believe that our relations with our employees are satisfactory.

Available Information

We make available, free of charge, on our Internet web site, www.pgrt.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the reports are electronically filed with the United States Securities and Exchange Commission. Copies of our governance guidelines, code of ethics and the charter of our audit committee are also available, free of charge, on our Internet web site, and are available in print to any shareholder who requests it from our investor relations representative c/o Prime Group Realty Trust, Investor Relations, 330 North Wabash Avenue, Suite 2800, Chicago, Illinois 60611.

ITEM 1A. RISK FACTORS

Investment in us presents risks. If any of the risk events described below actually occurs, our business, financial condition or results of operations could be adversely affected. Some statements in the following risk factors discussion, constitute “forward-looking statements.” Please refer to the section above entitled “Forward-Looking Statements.”

The current economic crises has resulted in a substantial loss in the value of office properties in general across the United States and in our portfolio in particular.

During the current economic crises over the past approximately 18 months, market conditions relating to office properties generally in the United States, and specifically in the Chicago area, have significantly deteriorated, with vacancy rates increasing, rents decreasing, prices for office properties falling and financing for such assets becoming difficult to obtain. This has caused and may continue to cause in the future a substantial loss in the value of office properties generally in the United States, and specifically in the Chicago area, including in our portfolio. This decline in value has required us to take non-cash asset impairment charges on six of the properties in our portfolio for calendar year 2009, in order to write-down the value of these properties in our financial statements to their estimated fair values. This decline in property values has also resulted in a net equity value per share for our Series B Shares that is significantly less than their liquidation preference of $25.00 per share. This loss in value has also resulted, and may in the future result, in the value of certain of our assets being less than the amount of debt on such asset, in which case, if the income from the asset becomes insufficient to service its debt, or if the debt on the asset matures and we are not able to refinance it on acceptable terms, the property may be foreclosed on by the lender or we may agree to deed the affected asset back to the lender in lieu of foreclosure. We may in the future have to take additional impairment charges on these and/or other of our properties to the extent market conditions continue to deteriorate or for other specific reasons applicable to a particular property.

Our properties depend upon the Chicago metropolitan area economy and its demand for office space.

With the exception of our joint venture interest in a building in Phoenix, Arizona, all of our properties are located in the Chicago metropolitan area, which exposes us to greater economic risks than if we owned properties in several geographic regions. Moreover, because our portfolio of properties consists primarily of office buildings, a decrease in the demand for office space 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 the Chicago metropolitan area, 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. We are also subject to adverse developments in the national and Chicago regional office space markets, such as oversupply of or reduced demand for office space. Any adverse economic or real estate developments in the Chicago metropolitan area, or any decrease in demand for office space, including those resulting from Chicago’s or Illinois’ regulatory environment, business climate or fiscal problems, could adversely impact our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume payment of dividends to holders of our Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

Our debt level reduces cash available for operations, capital expenditures and dividends to holders of our Series B Shares and our common shareholder, and has exposed us to the risk of default under our debt obligations.

Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fund necessary capital expenditures or to pay the distributions necessary to maintain our REIT qualification. Our relatively high level of debt and the limitations imposed on us by our loan agreements have and will probably continue to have significant adverse consequences to us, including the following:

•

our cash flow has been with respect to certain properties and may be in the future with respect to additional properties insufficient to meet our required principal and interest payments on the debt encumbering such properties;

•

we may be unable to borrow additional funds as needed or on favorable terms;

•

we may be unable to refinance our existing or future indebtedness at maturity or the refinancing terms may be less favorable than the terms of our existing indebtedness;

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because a portion of our debt bears interest at variable rates, increases in interest rates could increase our interest expense;

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we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

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we have defaulted on our obligations on certain properties and may in the future default on our obligations on additional properties and the lenders or mortgagees may foreclose on our affected properties that secure their loans and receive an assignment of rents and leases, or we may convey the affected properties to the lenders or mortgagees pursuant to a deed in lieu of foreclosure or similar transaction;

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we may violate restrictive covenants in our loan agreements, which would entitle the lenders to accelerate our debt obligations; and

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one of our subsidiaries that owns a parcel at the Continental Towers complex has defaulted on its indebtedness, which has triggered a cross-default provision in the indebtedness of a separate subsidiary that owns a parcel at the Continental Towers complex and the relevant lender has accelerated the maturity date of both loans.

If and when all or any of these events occur, our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares could be adversely affected. In addition, foreclosures could create taxable income without accompanying cash proceeds, a circumstance which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

In July 2009, we conveyed our 800-810 Jorie Boulevard property to the lender in exchange for a release of the loan because the cash flow from the property was insufficient to make required debt service payments.

On February 26, 2010, our two subsidiaries which own separate portions of our Continental Towers property notified the lender of the non-recourse notes on the property that they were each in default under the terms of their respective loan documents due to the property encumbered by one of the loans generating negative cash flow. On March 5, 2010, these two subsidiaries and the Operating Partnership received notices from the lender that the lender was accelerating the maturity date of the loans and demanding payment of all amounts due under the loans. It is highly likely that these properties will be conveyed to the lender pursuant to a deal in lieu of foreclosure or be foreclosed on by the lenders.

Additional properties we own may experience similar events if cash flow from such properties are insufficient to make debt service payments or if the related loan matures and we are not able to refinance it.

Domestic and international financial markets have experienced unusual volatility and uncertainty and financing has become difficult to obtain on satisfactory terms.

Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. Financing has become difficult to obtain on satisfactory terms making it difficult to refinance maturing debt or to obtain additional funds as they are needed. Our ability to borrow additional funds as needed or on favorable terms and our ability to refinance our existing or future indebtedness at maturity has already been significantly adversely impacted by these events. If we are unable to borrow additional funds or refinance indebtedness at maturity, the probability that one or more of the adverse consequences listed in the foregoing risk factors may occur will be increased.

One or more of our properties may face foreclosure by our lenders or we may voluntarily decide to convey one or more of our properties to a lender if a property’s cash flow is not enough to service its debt, operating expenses and capital requirements or if we cannot refinance a property upon debt maturity.

Many of our properties are encumbered by debt that is non-recourse to us (except for customary “non-recourse carve out” provisions relating to matters such as fraud, misallocation of funds and other customary exclusions which in many cases have been guaranteed). We recently disclosed that the cash flow from the Continental Towers Complex, owned by two of our subsidiaries, is not sufficient to service its first mortgage debt and that we are in discussions with the lender regarding the Complex. Should the cash flow from any of these properties cease to be sufficient to fund debt service, operating expenses and capital requirements relating to the property, or should we be unable to refinance a property’s debt upon the maturity of such debt, we may face foreclosure by our lenders on that property or we may decide to voluntarily convey the property to the relevant lenders in lieu of foreclosure. We may or may not decide to fund cash flow shortfalls at a property in such a circumstance. As a result of any loan defaults, our portfolio of properties may be reduced (resulting in a higher allocation of overhead to each of our remaining properties), our existing and potential future lenders and tenants may be less willing to consummate transactions with us based on such loan default by us, our shareholders will not be able to realize any value from any such properties and we may incur losses on our financial statements regarding any such properties. In addition, although we are currently not aware of any events which would give rise to liability under a non-recourse carve-out provision in our loan documents, if any lender attempted to claim such liability exists, such lender may attempt to recover any losses from and/or assert that a loan is completely recourse to, our Operating Partnership. In such a case, were the lender successful, the liability could be very significant.

Our Operating Losses for the last several years have been significant and we project them to continue for the foreseeable future, which has and will in the future significantly adversely impact our ability to continue operating our business.

We have over the last several years experienced significant operating losses and we project that our results of operations will continue to reflect operating losses in the foreseeable future. For example, our loss from continuing operations was $(88.3) million in calendar year 2009, $(58.3) million in calendar year 2008 and $(94.9) million in calendar year 2007. These continuing operating losses have and will in the future, significantly adversely impact our ability to continue operating our business, resume the payment of dividends to holders of our Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares. Among other things, continuing operating losses may result in us having insufficient funds to pay for required tenant improvement costs to attract new tenants and retain existing tenants, meet required principal and interest payments on our debt, and otherwise operate our business. Continuing operating losses have in the past and may in the future require that we dispose of one or more of our properties, possibly on disadvantageous terms.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire.

As of December 31, 2009, leases representing 29.1% of the annual rental revenue we receive for the properties in our portfolio, excluding the joint venture property, will expire in 2010. In addition, Jenner & Block at our 330 N. Wabash Avenue property, a tenant that represented approximately 16.3% of our annual total revenues, and Aon Corporation at our Continental Towers property, a tenant that represented approximately 3.6% of our annual total revenues, have not renewed their leases and have vacated their space. Above market rental rates at some of our properties have forced us and may continue to force us to renew or re-lease some expiring leases at lower rates. There can be no assurance that leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above their current net effective rental rates. If the rental rates for our properties remain lower then for some existing leases, 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 financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares will continue to be adversely affected.

Our performance and value are subject to risks associated with real estate assets and with the real estate industry.

Our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares depends on our ability to generate revenues in excess of (i) expenses, (ii) scheduled principal payments on debt and (iii) capital expenditure requirements. It also depends on our ability to obtain adequate financing and refinancing of our properties and to consummate certain capital transactions as necessary to generate any needed liquidity. Events and conditions generally applicable to owners and operators of real property in the United States generally, and Chicago particularly, that are beyond our control have in the past and may in the future continue to decrease cash available for distribution and the value of our properties. These events include:

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poor economic conditions in general, including high unemployment resulting in a need by tenants of less office space;

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local oversupply, increased competition or reduction in demand for office space;

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inability to collect rent from tenants;

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vacancies or our inability to rent space on favorable terms;

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increased operating costs, including insurance premiums, utilities and real estate taxes, due to inflation and other factors which may not necessarily be offset by increased rents;

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costs of complying with changes in governmental regulations;

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the relative illiquidity of real estate investments; and

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changing submarket demographics.

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, have in the past and may in the future result in a general decline in rents or an increased incidence of defaults under existing leases, which has in the past and could in the future continue to adversely affect our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

The current economic recession and weakness in the debt and capital markets may adversely affect our tenants’ ability to pay rent, our ability to lease space and our ability to obtain capital and refinance our existing debt as it becomes due.

The current economic recession and weakness in the debt and capital markets is adversely affecting many of our tenants and other parties we do business with, and has in the past could in the future result in the inability of some of our tenants to pay their rent in a timely manner and other parties we do business with to perform certain obligations they may have to us. In addition, the well-publicized slowdown in the debt and capital markets could make it difficult for us to obtain needed capital and financing, including refinancing our existing debt as it matures.

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

There are a number of office real estate companies that compete with us in seeking prospective tenants. All of our properties are located in developed areas where there are generally other properties of the same type and quality. Competition from other office properties affects our ability to attract and retain tenants and maintain or increase rental rates, particularly in light of the higher vacancy rates of many competing properties, which may result in lower-priced space being available in such properties. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, some of which are significantly above current market rates, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when their leases expire. As a result, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares could be adversely affected.

Covenants in our debt instruments could adversely affect our financial condition and restrict our range of operating activities.

The loan documents evidencing our loans contain certain covenants with our lenders, which include minimum ratios for debt service coverage and other financial covenants affecting us and certain of our properties. These covenants could limit our flexibility in conducting our operations and create the risk of a default on our indebtedness if we cannot continue to satisfy them. In addition, these covenants could limit our ability, without the prior consent of the appropriate lender, to further mortgage our properties. If we fail to comply with any of these covenants and are not able to get a waiver from the relevant lender, we will be in default under the relevant loan and any other loans, which may be cross-defaulted with such loan. If this occurs, the relevant lenders may foreclose on our properties that secure the loans, pursue us or our affiliates for any portion of the debt which is recourse and could adversely impact our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

There can be no assurance that we will be able to resume the payment of cash dividends to holders of Series B Shares or our common shareholder or pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

We have not paid quarterly dividends on our Series B Shares during calendar year 2009 and for the first quarter of 2010, and we currently do not pay regularly scheduled dividends on our common shares. In addition, there can be no assurances that we will be able to pay these accrued and unpaid Series B Share dividends or that we will be current in the future with dividends on our Series B Shares. In addition to this current suspension of dividends, we have several times in the past suspended the declaration and payment of dividends on both our preferred shares and our common shares. For example, on June 14, 2006, our Board suspended the payment of dividends on our Series B Shares. Dividends on the Series B Shares were not declared again until September 2006 when the Board declared one quarterly dividend and were not brought current until the Board declared two quarterly dividends in December 2006. In addition, in January 2002 our Board suspended dividends on our common shares and in April 2002 dividends on the Series B Shares were suspended. This suspension of preferred dividends was not lifted and dividends on our Series B Shares were not brought current until the closing of our Acquisition by Lightstone in July 2005. Regular dividends on our common shares were never resumed, although several common dividends have been declared since the Acquisition. However, there can be no assurances that the current suspension of Series B Share dividends will be lifted and that such dividends will be brought current, or that we will be able to pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

Our management and Board review our cash position, debt levels, requirements for cash reserves and market conditions each quarter prior to making any decision with respect to paying distributions/dividends. Any future dividends on our common shares and/or preferred shares will be made at the discretion of our Board and there can be no assurances that future dividends will be declared and paid. The declaration and payment of dividends will depend on the actual cash available for distribution, our financial condition, capital requirements, the completion of capital events, including refinancings and asset sales, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant. Dividends/distributions on our common shares and common units in the Operating Partnership are not permitted unless all current and any accumulated dividends on our Series B Shares and the related preferred units in the Operating Partnership have been paid in full or declared and set aside for payment.

Only our Series B Shares are currently listed on the NYSE and, therefore, we are entitled to rely on exemptions from certain corporate governance requirements.

Only our Series B Shares are currently listed on the NYSE. Under the NYSE rules, a company which only lists preferred shares or debt is not required to comply with certain of the NYSE corporate governance requirements, including (1) the requirement that a majority of the board of directors of a listed company consist of independent directors, (2) the requirement that a listed company have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We are currently utilizing these exemptions as they relate to our Board. As a result, we do not have a majority of independent trustees, nor do we have nominating and corporate governance and compensation committees. Accordingly, the holders of Series B Shares and our common shareholder may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

The average daily trading volume of our Series B Shares is relatively small, thus making it difficult to buy or sell significant numbers of shares without affecting the market price.

Our common shares are not publicly traded, and our Series B Shares are currently traded on the NYSE. However, based on the recent historical average daily trading volume of our Series B Shares, the acquisition or sale of a significant number of our Series B Shares on the NYSE will in most cases affect the market price of the Series B Shares, thus making it difficult or impossible to buy or sell large numbers of shares at or near the market price in effect immediately prior to any such purchase or sale. In addition, because the purchase or sale of relatively small numbers of shares may significantly impact the price of the Series B Shares, significant fluctuations in trading volume and price variations may occur, which may be unrelated to our operating performance.

Our filing of financial statements and other reports with the SEC are scheduled to cease and our Series B Shares are in the process of being delisted from the New York Stock Exchange.

The Agreement and Plan of Merger we entered into in connection with our July 2005 acquisition by Lightstone contained a covenant that we would continue to file our quarterly and annual financial statements on Form 10-Q and Form 10-K and current reports on Form 8-K with the SEC for five years after the closing of the Acquisition. This five year period expires on June 30, 2010. Even after the expiration of the five year period, we would continue to be obligated to file the financial statements and reports with the SEC so long as any of our securities remain registered under the Securities Exchange Act of 1934, as amended (the “1934 Act”). On January 11, 2010, we announced our intention to delist our Series B Shares from trading on the New York Stock Exchange, and to remove our Series B Shares from registration under the 1934 Act. Delisting and deregistering our Series B Shares may have an adverse effect on the marketability of our Series B Shares and, as a result, the market price for our Series B Shares might decrease and/or become more volatile. We currently intend to move the reporting of the trading of our Series B Shares to the Pink Sheets with Pink OTC Markets Inc.

Lightstone controls us, and will continue to control us, so long as one or more of its affiliates own a majority of our common shares.

Lightstone, through its subsidiary, Prime Office, beneficially owns all of our outstanding common shares. Our Board currently consists of seven trustees, of which three qualify as “independent” under NYSE rules. As long as Lightstone beneficially owns a majority of our outstanding common shares, Lightstone will continue to be able to elect the members of our Board, subject to the rights of our Series B preferred shareholders to elect two Trustees when dividends on the Series B Shares become six quarters in arrears. As a result, Lightstone will control all matters affecting us, including (i) the composition of a majority of our Board and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers, (ii) any determinations with respect to mergers or other business combinations, (iii) our acquisition or disposition of assets, (iv) our corporate finance activities and (v) the payment of dividends and other amounts on our common shares and Series B Shares.

Lightstone and its designees on our Board may have interests that conflict with our interests.

Lightstone and its designees on our Board may have interests that conflict with, or are different from, our own and/or holders of our Series B Shares. Conflicts of interest between Lightstone and us and/or holders of our Series B Shares may arise, and such conflicts of interest may not be resolved in a manner favorable to us and/or holders of Series B Shares, including potential competitive business activities, corporate opportunities, indemnity arrangements, registration rights, dividends on our common shares and Series B Shares and the exercise by Lightstone of its ability to control our management and affairs. Our organizational documents do not contain any provisions designed to facilitate resolution of actual or potential conflicts of interests, or to ensure that potential business opportunities that may become available to both Lightstone and us will be reserved for or made available to us. Pertinent provisions of law will govern any such matters if they arise.

We may sell or acquire additional assets which could adversely affect our operations and financial results.

We may sell or acquire real estate or acquire other real estate related companies when we believe a sale or acquisition is consistent with our business strategies. In addition, we may be required to sell one or more of our properties to obtain necessary cash proceeds for our own liquidity needs. However, we may not be successful in completing a desired sale or acquisition in a timely manner or pursuant to terms that are favorable to us, especially considering the current extremely unfavorable market conditions in the United States generally and Chicago particularly. Real estate investments may be, depending on market conditions, relatively difficult to buy and sell quickly. Consequently, we may have limited ability to vary our portfolio in response to changes in economic or other conditions. If we do complete an acquisition, we may not succeed in leasing any newly acquired properties at rental rates or upon other terms sufficient to cover the costs of acquisition and operations. Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management’s attention from other important matters. We may also abandon acquisition or sale opportunities prior to completion and consequently fail to recover expenses already incurred and have thus devoted significant amounts of management time to a matter not consummated. Furthermore, future acquisitions may expose us to significant additional liabilities, some of which we may not be aware of at the time of acquisition. If and when we do complete a sale, (i) we may not succeed in selling it for a price or on other terms favorable to us, and (ii) we will forego any future income from such sold property.

The redevelopment of certain of our existing properties that we may undertake could be costly and involve substantial risk.

As part of our operating strategy we may redevelop certain of our existing properties to upgrade the quality of an asset and/or change its use. Redeveloping real estate contains numerous risks, which may adversely affect our ability to make dividends to holders of Series B Shares and our common shareholder. These risks include the risks that (i) financing and/or equity for redevelopment projects may not be available on favorable terms, (ii) long-term financing to refinance any short-term construction financing may not be available upon the completion of a project, (iii) the failure to complete construction of a project on schedule or within budget may increase debt service expenses and construction costs, and (iv) we may be unable to find interested users to lease space in a project after its completion, thus making it difficult or impossible for us to recoup our investment or refinance our indebtedness on the project. We may also abandon redevelopment projects prior to the commencement or completion or construction and (a) consequently fail to recover expenses already incurred and (b) have thus devoted significant amounts of management time to a project which was not completed.

We depend on significant tenants.

For the year ended December 31, 2009, the five largest tenants in our portfolio represented approximately 34.2% of the total revenue generated by our properties, of which one tenant, Jenner & Block, represented approximately 16.3% of our total revenues and will not renew their lease when it expires in 2010. Our tenants may experience a downturn in their businesses, which may weaken their financial condition, result in their failure to make timely rental payments or result in their default under their leases. In the event of any tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs attempting to protect our investment.

The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under the United States Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owned under the lease. Our claim for unpaid rent would likely not be paid in full.

Our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares have been in the past and could be in the future materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in their business, or fail to renew their leases at all or renew on terms less favorable to us than their current terms. For example, Jenner & Block and Aon Corporation, the tenants referenced above, have not renewed their leases expiring April 30, 2010 and December 31, 2009, respectively, and have vacated their space.

Failure to qualify as a REIT would have significant adverse consequences to us.

We currently operate our business so as to qualify as a REIT under the Code. Although our management believes that we are organized and operate in such a manner, no assurance can be given that we will continue to be able to operate in a manner so as to qualify or remain so qualified. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this report are not binding on the IRS or any court. If we lose our REIT status, we will face serious tax and other significant consequences that would substantially reduce or eliminate the funds available for operations, capital improvements, debt service and dividends and other distributions to holders of Series B Shares and our common shareholder for each of the years involved because:

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we would not be allowed a deduction for dividends to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

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we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

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unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

In addition, if we fail to qualify as a REIT, we will not be required to make dividends to holders of Series B Shares and our common shareholder, and all dividends to such shareholders will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to raise capital, and would adversely affect the value of our common and preferred shares.

Qualification as a REIT involves the satisfaction of numerous requirements established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations under the Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. For example, in order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to shareholders aggregating annually at least 90% of our REIT taxable income, if any (determined without regard to the dividends paid deduction and by excluding net capital gains). In addition, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification.

Even if we qualify as and maintain our status as a REIT, we may be subject to certain federal, state and local taxes on our income and property. For example, if we were to generate net income from a “prohibited transaction,” such income will be subject to a 100.0% tax.

We are required to include in our annual reports a report of our management on our internal controls over our financial reporting under Section 404 of the Sarbanes Oxley Act of 2002. Any adverse results from future evaluations could result in a loss of investor confidence in our financial reports and have an adverse effect on the stock price of our Series B Shares and the value of our common shares.

We are required to comply with the Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities Exchange Commission, which include the requirement that our annual report include our management’s report on internal controls over financial reporting. To comply with these requirements the management report must contain an assessment of the effectiveness of our internal controls as of the end of each calendar year and we must disclose any material weakness in our internal controls over financial reporting that were identified by us. Management previously assessed the effectiveness of our internal controls over financial reporting for calendar years 2008 and 2007 and determined that as of December 31, 2008, and as

of December 31, 2007 in connection with the previously disclosed restatement of our financial statements for calendar year 2007, that we had material weaknesses in our internal controls over financial reporting as of these dates (see Item 9A — Controls and Procedures for a more detailed discussion of the foregoing). In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. For calendar year 2009, management has assessed the effectiveness of our internal controls over financial reporting and determined that as of December 31, 2009, our internal controls were effective. While our management believes that our consolidated financial statements included in this report are fairly stated, in all material respects, in accordance with GAAP, the fact that we have determined in the past that we had material weaknesses in our internal controls in the past could cause investors and other third parties to be reluctant to rely on the information contained in our financial statements. If we are unable in the future to assert that our internal controls over financial reporting are effective, we could lose investor confidence in our financial reports, which could have an adverse effect on the value of our Series B Shares and common shares and our ability to continue to operate our businesses.

Other regulations could adversely affect our financial condition.

Our properties also are subject to various federal, state and local regulatory requirements, such as state and local fire and safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in material compliance with all such regulatory requirements. There can be no assurance, however, that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures and could have an adverse effect on our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

We have in the past, and may in the future, attempt to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that such arrangements may not be effective in reducing our exposure to interest rate changes. Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares.

Potential losses may not be covered by insurance.

Our properties are covered by comprehensive liability, fire, flood, extended coverage, rental loss and all-risk insurance provided by various companies and with deductibles, limits and policy specifications customarily covered for similar properties. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to floods, riots or acts of war, or may be insured subject to specified limitations, such as large deductibles or co-payments. See Item 1 — Business — Insurance in this report for further discussion. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our investment in and the anticipated future cash flow from the affected property and may be obligated on any mortgage indebtedness, to the extent it is recourse indebtedness, or other obligations related to such property.

The completion of new developments adjacent to or near certain of our existing properties has and will in the future adversely affect the leasing, operation and value of those properties.

New projects recently completed may adversely affect our leasing efforts and the value of our properties, by among other things, blocking certain views from our properties and creating increased traffic and congestion. In addition, two large new office developments were recently completed in the vicinity of our 180 N. LaSalle and 330 N. Wabash Avenue properties. These projects directly compete with our properties referred to above and could materially adversely affect (i) our ability to retain our existing tenants, and attract new tenants, and (ii) for those existing tenants that we are able to retain and new tenants that we are able to attract, the business terms on which such deals are completed. This has and could in the future result in us leasing less space at lower rents and with higher costs at our properties than we could have otherwise, which has and will in the future materially adversely affect our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares. For example, one of our largest tenants, Jenner & Block recently moved into space in a new development in the vicinity of our 330 N. Wabash Avenue property.

Book losses that have been recognized and that may be recognized in the future have eroded, and may in the future erode, our book value.

During 2008, we recognized aggregate losses of $66.0 million (including $5.6 million provision for asset impairment) related to our investment in Extended Stay, Inc. (“ESH”). Although these losses are non-cash GAAP losses, they have contributed to the erosion of the book value of our ESH investment to zero as of December 31, 2008, compared to $40.3 million at December 31, 2007.

Consistent with our past practices and to the extent required by the accounting standards that apply to us, we may in the future take charges relating to other investments and assets which may also further reduce our book value. Although book value is reduced by non-cash charges such as depreciation and losses flowing through from ESH, reporting a low or negative book value could have adverse effects on us even if book value is not indicative of our actual value. These adverse effects may include our inability or a reduction in our ability (i) to finance or refinance our properties, (ii) lease space to tenants, (iii) consummate appropriate capital transactions, and (iv) continue to operate our business in the manner that we have in the past, and also may include a reduction in the market price of our Series B Shares. Our Board bases its decisions regarding dividends and other similar matters on the Company’s actual fair market net value and the solvency of the Company, among other things, which has significantly declined in part due to the current economic downturn and adverse financing conditions in the Chicago market and throughout the United States, and not on the book value of the Company.

We may incur significant costs of complying with the Americans with Disabilities Act and similar laws.

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the federal government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA, especially in connection with the redevelopment of any of our properties. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. If we incur substantial costs to comply with the ADA and any other legislation, our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares and our common shareholder and pay a significant portion of the amount due holders of the Series B Shares upon redemption of such shares could be adversely affected.

Liabilities for environmental matters could adversely affect our financial condition.

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in such property. These laws often impose liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial, and the presence of such substances may adversely affect the owner’s or operator’s ability to rent or sell such property or to borrow funds using such property as collateral and may expose such owner or operator to liability resulting from any release of or exposure to such substances. Persons who arrange for the disposal or treatment of hazardous or toxic substances at another location also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and therefore potentially liable for removal or remediation costs, as well as certain other related costs, including governmental penalties and injuries to persons and property. See Item 1 — Business — Government Regulations — Environmental Matters of this report for a more detailed discussion of environmental matters affecting us.

Future terrorist attacks in the United States could harm the demand for, and the values of, our properties.

Future terrorist attacks in the United States, such as the attacks that occurred on September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of our properties. Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs, and thereafter the availability of insurance for such acts may be limited or may cost more. To the extent that our tenants are impacted by any future attacks, their ability to continue to honor obligations under their existing leases with us could be adversely affected. In addition, certain tenants have termination rights in respect of certain casualties. If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property.

Our current and future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition and any disputes that may arise between us and our joint venture partners.

As of December 31, 2009, we owned one joint venture interest. In the future we may co-invest with, or sell interests in our existing properties to third parties through joint ventures. We may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have business interests or goals that are

inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments also may have the potential risk of impasses on decisions, such as those relating to a sale, refinancing or lease, because neither we nor the joint venture partner would have full control over the joint venture. Any disputes that may arise between us and the joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort principally on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the joint venture to incur additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party joint venture partners.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

General

As of December 31, 2009, our portfolio of properties consisted of 8 office properties, containing an aggregate of 3.3 million net rentable square feet located in metropolitan Chicago. We also owned a 23.1% common interest in a joint venture, which owns a 101,006 square foot office building located in Phoenix, Arizona.

Our management team has developed or redeveloped a significant number of office properties, including the redevelopment of the 180 North LaSalle Street building, all located in downtown Chicago, as well as the redevelopment of our Continental Towers property in Rolling Meadows, Illinois. In the course of such activities, we have acquired experience across a broad range of sophisticated development and redevelopment projects.

We do not currently anticipate commencing any new development projects in the near future. However, we do anticipate continuing with the ongoing redevelopment of our 330 N. Wabash Avenue property in Chicago, and we may undertake other redevelopments of all or portions of our properties that we determine are necessary or desirable to attract new tenants and/or retain current tenants, subject to the availability of sufficient funds to pay for any such redevelopment.

Our office properties are leased to tenants either (i) on a net basis with tenants obligated to pay their proportionate share of real estate taxes, insurance, utilities and operating expenses (ii) on a gross basis with the landlord responsible for the payment of all such expenses, or (iii) on a gross basis, with the landlord responsible for the payment of these expenses up to the amount incurred during the tenants’ first year of occupancy (“Base Year”), or a negotiated amount approximating the tenants’ pro rata share of these expenses (“Expense Stop”). In the latter cases, the tenants pay their pro rata share of increases in expenses above the Base Year or Expense Stop.

Properties

The following table sets forth certain information relating to each of our properties. Through the Operating Partnership and other subsidiaries, we own 100.0% fee-simple title in all of the office properties, except for the unconsolidated joint venture property identified below. Certain properties are encumbered by mortgages which can be found on Schedule III — Real Estate and Accumulated Depreciation.

						Net				Percentage
				Year Built/		Rentable				Occupied as
		Location		Renovated		Square Feet				of 12/31/09
Wholly-Owned Properties:
330 N. Wabash Avenue (1)		Chicago, IL		1971			1,141,760				83.4	%
Continental Towers		Rolling Meadows, IL		1977 thru			910,796				72.3	%
				1981/2001
180 North LaSalle Street		Chicago, IL		1982/1999			770,191				78.8	%
4343 Commerce Court (Olympian Office Center)		Lisle, IL		1989			167,756				72.3	%
Brush Hill Office Court		Westmont, IL		1986			110,299				90.0	%
280 Shuman Blvd. (Atrium Building)		Naperville, IL		1979			69,077				88.2	%
Enterprise Center II		Westchester, IL		1999			62,580				100.0	%
7100 Madison Avenue		Willowbrook, IL		1999			50,157				100.0	%
Portfolio total							3,282,616				79.6	%
Unconsolidated Joint Venture Properties:
Thistle Landing (2)		Phoenix, AZ		1999			101,006				54.7	%

ITEM 3. LEGAL PROCEEDINGS

Except as described below, neither we nor any of our properties are presently subject to any material litigation or legal proceeding, nor, to our knowledge, is any material litigation or legal proceeding threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have a material adverse effect on our consolidated financial statements.

On October 26, 2005, Prime/Mansur exercised its option to acquire our membership interest in the Plumcor/Thistle JV, and the parties subsequently executed the purchase and sale agreement for the sale. On December 22, 2005, we terminated the purchase and sale agreement relating to the Plumcor/Thistle JV because Prime/Mansur had failed to obtain our joint venture partner’s consent to the transaction by the December 15, 2005 deadline contained in the agreement. Prime/Mansur subsequently sent us a letter disputing our right to terminate the agreement, to which we replied with a letter reaffirming our right to terminate the agreement. On January 31, 2006, Prime/Mansur filed a lawsuit in the Circuit Court of Cook County, Illinois claiming that our termination of the purchase and sale agreement was not justified. Prime/Mansur requested the court to grant it either specific performance and order us to convey our joint venture interest in Plumcor Thistle to Prime/Mansur or damages in the amount of $5.0 million. On September 21, 2009, the judge in the case granted our motion for summary judgment and ruled that Prime/Mansur case had no merit. Prime/Mansur has appealed the decision and we intend to vigorously defend the judge’s decision. We believe the judge’s decision will not be reversed on appeal and the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

During 2006, the IRS began an examination of the income tax returns for our Operating Partnership for the years ended 2003 and 2004 and 180 N. LaSalle, L.L.C. for the year ended 2004. The IRS concluded its 2003 examination and we have been notified that no adjustments were proposed for the Operating Partnership for that tax year. As a result of its examination of the income tax return for 180 N. LaSalle, L.L.C. for the year ended 2004, the IRS has issued a Notice of Proposed Adjustment. The proposed adjustment would not have a cash effect on us but would decrease the amount of capital loss reported and carried forward on the tax return from the sale of its residual interest it held in a REMIC. We have appealed the adjustment and believe that we have legitimate defenses that the basis in the REMIC, as reported on the tax return, was correct. The IRS examination of the 2004 Operating Partnership income tax return will remain open until the final IRS ruling on the 2004 180 N. LaSalle, L.L.C. income tax return has been resolved.

In May 2007, we terminated the employment of Nancy Fendley, our former Executive Vice President of Leasing. Ms. Fendley has disputed such termination and, on May 29, 2007, filed a lawsuit against us in the Circuit Court of Cook County, Illinois alleging a breach of her employment agreement and seeking approximately $9.0 million in damages. We believe we have valid defenses to her claims and intend to vigorously contest the lawsuit. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

In connection with the purchase and sale agreement for the proposed sale of our 180 N. LaSalle Street property that our subsidiary, 180 LLC, entered into in August 2008 and later terminated because of the failure of the Purchaser to timely close, one of the purchasers under the agreement (YPI LaSalle Owner, LLC, a subsidiary of the original Purchaser) filed a lawsuit on February 13, 2009 against 180 LLC in the Circuit Court of Cook County, Illinois, Chancery Division. In the lawsuit, the Purchaser claims that the purchase agreement should be rescinded due to the doctrine of impossibility and impracticability and that 180 LLC should return the $6.0 million earnest money to Purchaser because it was impossible for Purchaser to obtain financing and that therefore it should be excused from closing, even though the purchase agreement contained no financing contingency. On July 7, 2009, the judge dismissed the Purchaser’s lawsuit with prejudice. The Purchaser filed an appeal of this decision on July 10, 2009. In our opinion, after consultation with legal counsel, we believe that this appeal is without merit and that we will prevail in it. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

On October 20, 2009, Mr. Dean Konstand filed a shareholder derivative complaint in the Circuit Court of Cook County, Illinois, Chancery Division, against us, Lightstone, Prime Office and the members of our Board in place immediately after the closing of our acquisition by Lightstone, consisting of David Lichtenstein, Jeffrey A. Patterson, John M. Sabin, Michael M. Schurer, Shawn R. Tominus, Bruno De Vinck and George R. Whittemore. In this case, the plaintiff is alleging that the common dividends declared by the Board in July 2005 and February 2006 constituted a breach of the Board’s duty of loyalty and care, and good faith and fair dealing, to the Company and the holders of the Series B Shares, and that this breach was directed by Lightstone and Prime Office. The plaintiff requests for the benefit of the Company that the court grant a judgment in favor of the Company against all of the other defendants in the amount of $106 million, the amount of the dividends that were declared on the foregoing dates. We are incurring the costs of defense of this action as it relates to the members of our Board under our indemnification obligations with our Board members. The Defendants have filed a Motion to Dismiss this action and briefs are being filed by the parties. The costs of defense of the Board members may be covered in whole or in part by our directors and officers liability insurance, subject to coverage limits and applicable deductibles. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

Effective September 24, 2009, the current owner of Citadel Center (“131 LLC”), terminated the management agreement pursuant to which a subsidiary of our Operating Partnership managed the Citadel Center property. We believe that this termination was wrongful and was in violation of the terms of our management agreement with 131 LLC. We also believe that under Illinois law, by wrongfully terminating the management agreement, 131 LLC has released us from liability for the Citadel Reimbursement Obligation, because the indemnification agreement which provides for such liability was entered into simultaneously with, and as part of the same transaction as, the management agreement. On October 13, 2009, we filed suit in the Circuit Court of Cook County, Illinois against 131 LLC for damages and a declaratory judgment that we no longer have any obligations under the management agreement, the indemnification agreement, and two related escrow agreements, and that the amounts held pursuant to such escrow agreements should be paid to us by 131 LLC immediately. We currently intend at this time to continue satisfying the Citadel Reimbursement Obligation while the case is pending and until we receive a ruling that we no longer have any liability for such obligations, although this intention could change in the future.

We are a defendant in various other legal actions arising in the normal course of business. We record a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although the outcome of any litigation is uncertain, we believe that such legal actions will not have a material adverse affect on our consolidated financial condition or results of operations.

ITEM 4. REMOVED AND RESERVED

PART II

Our common shares traded on the NYSE under the symbol “PGE” from November 12, 1997 through July 1, 2005, the effective date of the Acquisition. We are the sole general partner of the Operating Partnership and own all of the preferred units. We own 0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred units in the Operating Partnership. Each preferred unit and common unit entitled us to receive distributions from our Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares are based upon the distributions we receive with respect to our common units and preferred units. Our Series B Shares remain outstanding after the completion of the Acquisition and at the present time continue to be publicly traded on the NYSE.

Prime Office currently owns 99.1% of the outstanding common units in the Operating Partnership and PGRT currently owns 0.9% of the outstanding common units in the Operating Partnership.

The following table sets forth the common share dividends we paid for the years ended December 31, 2008 and 2009:

		Cash
		Dividends
		Paid (per share)
Year 2008
First quarter			0.112255
Second quarter			0.561275
Third quarter			—
Fourth quarter			—
Year 2009
First quarter			—
Second quarter			—
Third quarter			—
Fourth quarter			—

On February 12, 2008 our Board declared a distribution to the holders of the 26,488,389 common limited partnership interests in the Company’s operating partnership and the 236,483 common shares of the Company, in an amount of $0.112255 per unit/share and having a record date of February 12, 2008 and a payment date of February 13, 2008. On May 2, 2008 our Board declared a distribution to the holders of the 26,488,389 common limited partnership interests in the Company’s operating partnership and the 236,483 common shares of the Company, in an amount of $0.561275 per unit/share and having a record date of May 2, 2008 and a payment date of May 2, 2008.

We announced that our Board determined not to declare a quarterly distribution on our Series B Shares for any of the four quarters of 2009 and the first quarter of 2010, and that the Board was unable to determine when we will recommence distributions on our Series B Shares. The total arrearage in payment of dividends on the Series B Shares is five quarters of dividends or $11.25 million. The Board is also in the process of considering various financing, capitalization, asset sales and other alternatives for the Company.

Dividends paid in the amount of $0.5625 per share in 2009 (which were applicable to the fourth quarter of 2008) on our Series B Shares have been determined to be a return of capital. There can be no assurances as to the timing and amounts of any future dividends on our Series B Shares.

Our management and Board review our cash position, the status of potential capital events, debt levels and requirements for cash reserves each quarter prior to making any decision with respect to paying distributions/dividends. Any future dividends on our common shares and dividends on our Series B Shares will be made at the discretion of our Board. These dividends will depend on the actual cash available for distribution, our financial condition, capital requirements, the completion of capital events, including refinancings and asset sales, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant. Dividends/distributions on our common shares and common units are not permitted unless all current and any accumulated dividends on our Series B Shares and the related preferred units in the Operating Partnership have been paid in full or declared and set aside for payment.

Equity Compensation Plans. For a discussion of our equity compensation plans see the information contained in Item 12 — Security Ownership of Certain Beneficial Owners and Management — Equity Compensation Plan Information of this report.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by Issuer and Affiliated Purchasers

None.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected consolidated financial data and should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K. All amounts have also been restated in accordance with the discontinued operations provision under U.S. GAAP and reflects adoption of accounting guidance on noncontrolling interest in 2009.

		December 31,
		2009				2008				2007				2006				2005
		(dollars in thousands)
Balance Sheet Data
Real estate assets before accumulated depreciation		$	379,561			$	475,103			$	499,050			$	482,447			$	471,892
Total assets			393,184				521,658				671,916				649,928				771,921
Mortgage notes and notes payable			341,750				447,871				567,910				453,695				452,965
Total liabilities			389,454				515,690				635,559				524,868				530,668
Noncontrolling interest			(82,109	)			—				—				20,770				135,853
Total equity — Prime Group Realty Trust			3,730				5,968				36,357				104,375				105,400

		Post-Acquisition																					Pre-Acquisition
																		Six months					Six months
																		ended					ended
		For the years ended December 31,																December 31,					June 30,
		2009				2008				2007				2006				2005					2005
																							(dollars in
																							thousands,
																							except per
						(dollars in thousands, except per share amounts)																	share amounts)
Operation Data
Total revenue		$	77,915			$	82,743			$	86,874			$	92,693			$	45,420				$	44,718
Operating (loss) income			(63,314	)			7,506				2,401				122				(1,544	)				(5,174	)
Loss from continuing operations			(88,316	)			(58,295	)			(94,915	)			(50,158	)			(18,875	)				(12,947	)
Net loss			(88,280	)			(61,567	)			(93,920	)			(50,391	)			(15,814	)				(23,878	)
Net loss available to common shareholders			(8,481	)			(82,336	)			(68,018	)			(353	)			(181	)				(24,071	)
Basic and diluted loss attributable to common shareholders per common share:
Loss from continuing operations		$	(35.86	)		$	(348.05	)		$	(287.66	)		$	(1.48	)		$	(0.88	)			$	(0.61	)
Net loss attributable to common shareholders per common share — basic and diluted			(35.86	)			(348.17	)			(287.62	)			(1.49	)			(0.76	)				(1.02	)
Weighted average common shares outstanding — basic and diluted			236,483				236,483				236,483				236,483				236,483					23,658,579
Dividends paid per common share			—				0.67353				—				2.8438				1.1225					—
Dividends paid per preferred share			0.5625				2.25				2.8125				1.6875				4.50					1.125
Cash Flow and Operating Data
Cash flow provided by (used in):
Operating activities		$	3,906			$	1,763			$	7,301			$	638			$	1,236				$	(6,659	)
Investing activities			(8,008	)			79,341				(135,867	)			70,603				(60,044	)				2,258
Financing activities			559				(103,578	)			106,348				(28,739	)			6,773					2,314
Office Properties:
Square footage			3,282,616				3,476,304				3,800,567				3,865,828				3,772,482					4,636,918
Occupancy (%)			79.6				78.1				74.1				79.0				83.7					82.8
Industrial Properties:
Square footage			—				—				120,004				120,004				120,004					120,004
Occupancy (%)			—				—				100.0				100.0				100.0					100.0
Unconsolidated Joint Venture Properties:
Square footage			101,066				101,066				1,060,264				1,060,725				2,554,866					2,833,068
Occupancy (%)			54.7				54.7				83.7				76.4				77.6					80.9

Overview

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

We are a fully-integrated, self-administered and self-managed REIT which owns, manages, leases, develops and redevelops office real estate, primarily in metropolitan Chicago. As of December 31, 2009, our portfolio of properties consists of 8 office properties, containing an aggregate of 3.3 million net rentable square feet. In addition, we have a joint venture interest in an office property containing an aggregate of 101,000 net rentable square feet. We lease and manage 3.3 million square feet comprising all of our wholly-owned properties. We are also the asset and development manager for an approximately 1.1 million square foot office building located at 1407 Broadway Avenue in New York, New York, which is owned by affiliates of Lightstone, although we are currently scheduled to cease performing these services effective April 4, 2010.

All of our properties, except our joint venture property located in Phoenix, Arizona, are located in the Chicago metropolitan area in prime business locations within established business communities and account for all of our rental revenue and tenant reimbursements revenue.

Our joint venture interest is accounted for as an investment in unconsolidated joint venture under the equity method of accounting, which consisted of a 23.1% common interest in a joint venture which owns an office building located in Phoenix, Arizona.

Our results reflect the general weakness in the office leasing market in the Chicago metropolitan area over the past several years. Due to weakness in the leasing market, we have been challenged to retain existing tenants and locate new tenants for our vacant and non-renewing space at acceptable economic rental rates. In addition, the supply of downtown Chicago office space continues to grow, principally as a result of the construction of new office buildings. As these buildings continue to come on line in the next year, the additional supply may add to the challenge.

Our management is addressing this challenge by increasing our marketing efforts both through working with the office brokerage community and in direct marketing campaigns to prospective users of office space in our market, as well as investing in targeted capital expenditures to improve our properties in order to enhance our position in our market. In addition, our Board is also in the process of considering various financing, capitalization, asset sales and other alternatives for the Company.

Our income and cash flow is derived primarily from rental revenue (including tenant reimbursements) from our properties. The following summarizes our portfolio occupancy at the end of each quarter of 2009 and the end of 2008, excluding properties sold in subsequent periods and our previous membership interest in the entity that owns extended-stay hotel properties:

		Portfolio Occupancy
		December 31,				September 30,				June 30,				March 31,				December 31,
		2009				2009				2009				2009				2008
Portfolio Total			79.6	%			81.2	%			79.8	%			78.5	%			78.1	%
Unconsolidated Joint Venture Property			54.7	%			54.7	%			54.7	%			54.7	%			54.7	%

Key Performance Indicators

We evaluate the performance of our operations based on the occupancy percentages and operating profit of each of our properties, including their rental revenue, tenant reimbursement revenue, property operations expense and administrative expenses, as well as tenant retention and the results of tenant satisfaction surveys. We also use other metrics such as gross rent, occupancy, percent of property operating expenses recovered and net effective rent in analyzing individual tenant lease agreements.

We used the purchase method of accounting to record the assets and liabilities in connection with the Acquisition. Accordingly, the financial statements as of and for the period ended subsequent to the Acquisition are not comparable in all material respects to our financial statements as of and for periods ended prior to the Acquisition.

Results of Operations

Comparison of the year ended December 31, 2009 to the year ended December 31, 2008

The table below represents selected operating information for our portfolio. Property revenues include rental revenues, tenant reimbursements and other property operating revenues. Property operating expenses include real estate taxes, utilities and other property operating expenses.

(Dollars in thousands)		2009				2008				$ Change
Property revenues		$	76,934			$	81,580			$	(4,646	)
Services Company revenues			981				1,163				(182	)
Total revenues			77,915				82,743				(4,828	)
Property operating expenses			41,524				42,982				(1,458	)
Depreciation and amortization			27,619				23,898				3,721
General and administrative			6,211				6,873				(662	)
Services Company operations			1,063				1,484				(421	)
Provision for asset impairment			63,013				—				63,013
Loss on tax indemnification			1,799				—				1,799
Total expenses			141,229				75,237				65,992
Operating (loss) income			(63,314	)			7,506				(70,820	)
Interest and other income			4,948				1,394				3,554
Income (loss) from investments in unconsolidated joint ventures			84				(60,343	)			60,427
Provision for asset impairment from unconsolidated joint ventures			—				(5,633	)			5,633
Interest:
Expense			(25,790	)			(32,098	)			6,308
Amortization of deferred financing costs			(4,244	)			(2,244	)			(2,000	)
Recovery of distributions and losses to noncontrolling interest in excess of basis			—				14,222				(14,222	)
Distributions and losses to noncontrolling interest in excess of basis			—				(20,293	)			20,293
Gain on sales of real estate and joint venture interest			—				39,194				(39,194	)
Loss from continuing operations			(88,316	)			(58,295	)			(30,021	)
Discontinued operations			36				(3,272	)			3,308
Net loss		$	(88,280	)		$	(61,567	)		$	(26,713	)

Property Revenues. The decrease of $4.6 million in property revenues was primarily due to decreased recovery revenues resulting from reduced property operating expenses ($0.7 million), decreased occupancy at some of our properties ($1.7 million), early termination fee income in 2008 at our 180 N. LaSalle Street property ($0.8 million), decreased management fee income due to termination of management contracts ($0.8 million) and decreased parking garage revenues at our 330 N. Wabash Avenue property ($0.9 million).

Property Operating Expenses. The decrease of $1.5 million in property operating expenses was primarily due to decreased utility expenses as a result of favorable weather conditions, lower occupancy at some of our properties, and adjustments to the estimated real estate taxes for our properties.

Depreciation and Amortization. The increase of $3.7 million in depreciation and amortization was primarily due to the reinstatement of the depreciation and amortization in 2009 associated with our 180 North LaSalle Street property related to the period that it was classified as property held for sale in 2008. In accordance with U.S. GAAP, depreciation and amortization ceases when a property is classified as held for sale.

General and Administrative. The decrease of $0.7 million in general and administrative expense is primarily due to decreased employee bonuses and reduced rent expense due to relocation of corporate office, partially offset by increased strategic alternative costs and increased employee severance costs due to personnel reductions in 2009.

Provision for Asset Impairment. The increase of $63.0 million in provisions for asset impairment was to reduce net book value to its estimated fair value on five properties in the fourth quarter of 2009. One property, 7100 Madison Avenue, was impaired $0.5 million and was sold on February 1, 2010.

In 2009, our Continental Towers property was considered impaired based on the property generating negative cash flows, a decline in occupancy and forecasted future losses. The Company recorded an asset impairment of $59.9 million which represents the difference between the carrying value and estimated fair value of this property. The carrying value of this property is approximately $65.3 million, which is less than the debt balance of $115.0 million at December 31, 2009. The Company is currently in discussions with the Lender on a potential deed in lieu of foreclosure transaction with the lender (see Note 17 — Subsequent Events in the Notes to Consolidated Financial Statements). If this transaction materializes, the difference between the loan balance and carrying value of the property would be recognized as a gain on extinguishment of debt in the period the transaction closes.

The other properties that were impaired included Brush Hill Office Court ($1.8 million), Enterprise Center II ($0.1 million) and Atrium Building ($0.7 million).

Loss on Tax Imdemnification. The increase of $1.8 million in loss on tax imdenification reflects a payment to terminate a tax indemification agreement on our Continental Towers property.

Interest and Other Income. The increase of $3.6 million in interest and other income was primarily due to an earnest money deposit recorded as income due to the termination of a sale agreement relating to our 180 N. LaSalle Street property. This increase was partially offset by decreases in interest income due to a decrease in both the investment rates and investment account balances.

Income (loss) from Investments in Unconsolidated Joint Ventures. The decrease of $60.4 million in loss from investments in unconsolidated joint ventures was primarily due to the non-cash allocation of losses in 2008 from our investment in BHAC Capital IV, L.L.C. (“BHAC”), an entity that owns 100% of ESH.

Provision for Asset Impairment from Unconsolidated Joint Ventures. The $5.6 million provision for asset impairment in 2008 represents the write-down of the investment balance in ESH as the impairment was deemed to be other than temporary due to past and expected inability to sustain earnings at a level which would justify the carrying value.

Interest Expense. The decrease of $6.3 million in interest expense was primarily due to the assignment of our membership interest in BHAC and transfer of the related non-recourse loan (“Citicorp Loan”) from Citicorp USA, associated with our investment in ESH, in the third quarter of 2009 and a reduction in interest expense on our 330 N. Wabash Avenue property due to the March 2008 sale of a portion of the property and partial repayment and simultaneous refinancing of the debt.

Amortization of Deferred Financing Costs. The increase of $2.0 million in amortization of deferred financing costs was primarily due to an increase in non-cash accrued finance charges related to the exit and restructuring fees on the Citicorp Loan associated with our investment in ESH. We assigned our membership interest in BHAC and transferred the related Citicorp Loan in the third quarter of 2009.

Recovery of Distributions and Losses to Noncontrolling Interest in Excess of Basis. The decrease of approximately $14.2 million in recovery of distributions and losses to noncontrolling interest in excess of basis relates to the recovery in 2008 of losses previously recognized in 2007.

Distributions and Losses to Noncontrolling Interest in Excess of Basis. The decrease of $20.3 million in distributions and losses to noncontrolling interest in excess of basis represents 2008 losses resulting in a deficit position in the noncontrolling interest balance. Losses in excess of the noncontrolling interest basis were charged to operations under U.S. GAAP in 2008, as a result of the noncontrolling interest holder having no contractual obligation to return such amounts, to fund operations or restore any capital deficits. Under U.S. GAAP in 2009, distributions and losses to noncontrolling interest in excess of basis will no longer be allocated to PGRT.

Gain on Sales of Real Estate and Joint Venture Interests. The decrease of $39.2 million in gain on sales of real estate and joint venture interests was primarily due to both the sale of our 50% joint venture interest in The United Building ($29.4 million) and the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property ($9.8 million) during the first quarter of 2008.

Discontinued Operations. Discontinued operations include the results of operations of our 800-810 Jorie Boulevard property; which was conveyed to the lender in exchange for a release of the related loan in July 2009; 1051 North Kirk Road property, which was sold in May 2008; and the residual effects related to properties sold in prior years.

Results of Operations

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

The table below represents selected operating information for our portfolio. Property revenues include rental revenues, tenant reimbursements and other property operating revenues. Property operating expenses include real estate taxes, utilities and other property operating expenses.

(Dollars in thousands)		2008				2007				$ Change
Property revenues		$	81,580			$	83,515			$	(1,935	)
Services Company revenues			1,163				3,359				(2,196	)
Total revenues			82,743				86,874				(4,131	)
Property operating expenses			42,982				45,225				(2,243	)
Depreciation and amortization			23,898				30,203				(6,305	)
General and administrative			6,873				6,210				663
Services Company operations			1,484				2,835				(1,351	)
Total expenses			75,237				84,473				(9,236	)
Operating (loss) income			7,506				2,401				5,105
Interest and other income			1,394				2,928				(1,534	)
Loss from investments in unconsolidated joint ventures			(60,343	)			(49,687	)			(10,656	)
Provision for asset impairment from unconsolidated joint ventures			(5,633	)			—				(5,633	)
Interest:
Expense			(32,098	)			(35,425	)			3,327
Amortization of deferred financing costs			(2,244	)			(910	)			(1,334	)
Recovery of distribution and losses to noncontrolling interest in excess of basis			14,222				—				14,222
Distributions and losses to noncontrolling interest in excess of basis			(20,293	)			(14,222	)			(6,071	)
Gain on sales of real estate and joint venture interests			39,194				—				39,194
Loss from continuing operations			(58,295	)			(94,915	)			36,620
Discontinued operations			(3,272	)			995				(4,267	)
Net income (loss)		$	(61,567	)		$	(93,920	)		$	32,353

Property Revenues. The decrease of $1.9 million in property revenues was primarily due to decreased occupancy at our Continental Towers ($1.7 million) and 330 N. Wabash Avenue ($1.0 million) properties as a result of tenant leases expiring, and the recognition of additional rental revenue in 2007. These decreases were partially offset by a lease termination fee in 2008 at our 180 North LaSalle Street property.

Services Company Revenues. The decrease of $2.2 million in our Services Company revenues during 2008 was primarily due to leasing commission income in 2007 as a result of leasing activity at The United Building that did not occur in 2008.

Property Operating Expenses. The decrease of $2.2 million in property operating expenses was primarily due to adjustments for real estate taxes being less than previously projected ($1.6 million), the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008, which transferred those operating expenses to the purchaser ($1.4 million), and lower professional fees at our 300 N. Wabash Avenue property ($0.2 million). These decreases were partially offset by bad debt expense associated with a tenant at our 330 N. Wabash Avenue property ($0.7 million).

Depreciation and Amortization. The decrease of $6.3 million in depreciation and amortization was primarily due to the accelerated depreciation and amortization of tenant improvements and in-place lease values in connection with a lease amendment executed with a tenant at our Continental Towers property in 2007 (which resulted in an increase to depreciation and amortization in 2007 of $3.1 million and a decrease in depreciation and amortization in 2008 of $0.7 million), the depreciation and amortization associated with our 180 North LaSalle Street property related to the period that it was held for sale in 2008 ($1.9 million) and the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008, which transferred the depreciable assets to the purchaser ($0.9 million). These decreases were partially offset by the accretion of accrued environmental remediation liabilities at our 330 N. Wabash Avenue property ($0.4 million).

General and Administrative. The increase of $0.7 million in general and administrative expenses was primarily due to increased employee severance costs due to personnel reductions ($0.2 million), increased audit fees due to the restatement of prior period financial statements ($0.2 million), and increased legal fees relating to ongoing litigation ($0.2 million).

Services Company Operations. The decrease of $1.4 million in Services Company operations was primarily due to a reduction in the provision for income taxes of $0.5 million due to decreased profitability in 2008 (see Services Company revenues discussion for further details). In addition, expenses decreased $0.9 million due to the January 2008 sale of our 50% joint venture interest in The United Building.

Loss From Investments in Unconsolidated Joint Ventures. The increase of $10.7 million in loss from investments in unconsolidated joint ventures was primarily due to the non-cash allocation of losses from our investment in a membership interest in an entity that owns extended-stay hotel properties ($60.3 million). This was partially offset by losses of $49.6 million recognized in 2007 that did not occur in 2008 due to the sale of our joint venture interest in The United Building in January 2008.

Provision for Asset Impairment from Unconsolidated Joint Ventures. The $5.6 million change in provision for asset impairment represents the write-down of the remaining balance of our investment in the membership interest in BHAC, an entity that owned 100% of ESH, as the investment was deemed to be other than temporary due to past and expected inability to sustain earnings at a level which would justify the carrying value.

Interest and Other Income. The decrease of $1.5 million in interest and other income was primarily due to a decrease in interest income related to our short-term investments and restricted escrow accounts. The decrease was a result of a reduction in average balances in these accounts, as well as, in average interest rates from 5.0% in 2007 to 2.4% in 2008.

Interest Expense. The decrease of $3.3 million in interest expense was primarily due to a $5.6 million reduction from the March 2008 refinancing of the debt associated with our 330 N. Wabash Avenue property and a $1.7 million savings realized through the January 2008 retirement of the two Citicorp mezzanine loans. These decreases were partially offset by a $3.5 million increased interest expense associated with the new terms of the non-recourse Citicorp Loan associated with our investment in ESH.

Amortization of Deferred Financing Costs. The increase of $1.3 million in the amortization of deferred financing costs was primarily attributable to an increase in deferred finance charges related to the non-recourse loan associated with our investment in ESH.

Recovery of Distributions and Losses to Noncontrolling Interest in Excess of Basis. The increase of approximately $14.2 million in recovery of distributions and losses to noncontrolling interest in excess of basis relates to the recovery of losses previously recognized in 2007.

Distributions and Losses to Noncontrolling Interest in Excess of Basis. The increase of $6.1 million in distributions and losses to noncontrolling interest in excess of basis represents then current year losses resulting in a deficit position in the noncontrolling interest balance. Losses in excess of the noncontrolling interest basis have been charged to operations as a result of the noncontrolling interest holder having no contractual obligation to return such amounts, to fund operations or to restore any capital deficits.

Gain on Sales of Real Estate and Joint Venture Interests. The increase of $39.2 million in gain on sales of real estate and joint venture interests was primarily due to both the sale of our 50% joint venture interest in The United Building ($29.4 million) and the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property ($9.8 million) in 2008.

Discontinued Operations. Discontinued operations include the results of operations of our 1051 North Kirk Road property (sold in 2008), our Narco River Business Center property (sold in 2007) and the residual effects related to properties sold in prior years.

Liquidity and Capital Resources

Recent Developments.

Dividends. On January 7, 2009, our Board declared a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and was paid on January 30, 2009.

We announced that our Board determined not to declare a quarterly distribution on our Series B Shares for any of the four quarters of 2009 and first quarter of 2010 and that the Board was unable to determine when we will recommence distributions on our Series B Shares. The total arrearage in payment of dividends on the Series B Shares is five quarters of dividends or $11.25 million. The Board is also in the process of considering various financing, capitalization, asset sales and other alternatives for the Company.

The Board’s decision was based on our current capital resources and liquidity needs and the overall negative state of the economy and capital markets, including the decline in value for office properties in the United States, including the Chicago area. The Board intends to review the suspension of our Series B Shares distributions periodically based on the Board’s ongoing review of our financial results, capital resources and liquidity needs, and the condition of the economy, capital markets and office property markets. We can give no assurances that distributions on our Series B Shares will be resumed, or that any financing, capitalization, asset sales or other alternatives will be satisfactorily concluded.

180 North LaSalle Street Sale. In September 2008, we entered into a purchase and sale agreement (as amended, the “Agreement”) with Younan Properties, Inc. (“Purchaser”) whereby Purchaser became obligated to purchase 180 North LaSalle Street, Chicago, Illinois (the “Property”), from the subsidiary of the Company, 180 N. LaSalle II, L.L.C. (“180 LLC”) that owns the Property.

Pursuant to the terms of the Agreement, the Purchaser was obligated to close the transaction and purchase the Property from 180 LLC on February 18, 2009. The Purchaser failed to close by that deadline. On February 19, 2009, 180 LLC sent a letter to the Purchaser stating that the Purchaser was in default under the Agreement and that 180 LLC was terminating the Agreement. Because the Purchaser failed to close the transaction and purchase the Property prior to the February 18, 2009 deadline, under the terms of the agreement, 180 LLC is entitled to retain as liquidated damages the $6.0 million of earnest money that the Purchaser previously deposited with 180 LLC. As a result, we have recorded $5.3 million, net of costs, as other income in our consolidated financial statements. In addition, in the first quarter of 2009, we reinstated depreciation and amortization associated with the property related to the period that it was classified as property held for sale in 2008, which was approximately $3.0 million. In accordance with U.S. GAAP, the Company ceases depreciation and amortization when a property is classified as held for sale.

On February 13, 2009, the Purchaser filed a lawsuit against 180 LLC seeking to rescind the Agreement and obtain the return of the earnest money because the Purchaser claims it was impossible for it to obtain financing for the acquisition due to economic conditions at the time. On July 7, 2009, the judge dismissed the Purchaser’s lawsuit with prejudice. The Purchaser filed an appeal of this decision on July 10, 2009. In our opinion, after consultation with legal counsel, we believe the Purchaser’s appeal is without merit and anticipate that we will prevail in the appeal. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse effect on our consolidated financial condition or results of operations.

7100 Madison Avenue Sale. On February 1, 2010 we completed the sale of our 7100 Madison Avenue property for the purchase price of $4.3 million and received $0.5 million in net proceeds.

180 North LaSalle Street Sale in 2010. On February 25, 2010, the Company’s entered into a purchase and sale agreement to sell the 180 North LaSalle Street property to an entity indirectly controlled by Mr. Michael Silberberg of Nanuet, New York which was approved by the Company’s Board of Directors. The gross purchase price for this property is $72.25 million, subject to customary pro-rations, credits and adjustments.

The closing of the sale is conditioned upon the existing first mortgage lender consenting to the assumption of the property’s existing debt by the purchaser, unless the purchaser notifies the Company that the purchaser has elected not to assume the existing debt and will instead obtain new financing for the acquisition. The purchaser has deposited $4.0 million in escrow to secure its obligation to purchase this property, which is nonrefundable except upon (i) the failure of the first mortgage lender to consent to the assumption of the existing debt by the purchaser or (ii) the occurrence of certain other customary events, such as a default by the Company or the failure of the Company to deliver certain satisfactory tenant estoppel certificates. The Company currently estimates that after closing adjustments and costs, that it will receive net proceeds of approximately $12.8 million.

It is currently contemplated that the closing will occur in May or June 2010. In the event that the purchaser defaults on its obligation to purchase this property, the Company’s sole remedy is to receive the $4.0 million deposited in escrow.

Continental Towers Loan Default. A subsidiary of the Company, Continental Towers, L.L.C. (“CT LLC”), is the owner of Tower I, Tower III and the Commercium at the Continental Towers Complex in Rolling Meadows, Illinois (the “CT Property”). The CT Property is currently encumbered by a first mortgage loan from CWCapital LLC (“Lender”) in the principal amount of $73.6 million (the “CT Loan”). A separate subsidiary of the Company, Continental Towers Associates III, LLC (“CTA III”), is the owner of Tower II at the Continental Towers Complex (the “CTA III Property”). The CTA III Property is currently encumbered by a first mortgage loan from Lender in the principal amount of $41.4 million (the “CTA III Loan”).

On February 26, 2010, CTA III informed the Lender that it is in default under the CTA III Loan because the cash flow from the CTA III Property is not sufficient to pay the required escrows and debt service payments on the CTA III Loan. On the same day, CT LLC acknowledged to the Lender that the CT Loan is in default because it is cross-defaulted with the CTA III Loan. On March 5, 2010, these two subsidiaries and the Operating Partnership received notices from the Lender that the Lender was accelerating the maturity dates of the loans and demanding payment of all amounts due under the loans.

CTA III and CT LLC are currently in discussions with the Lender regarding the foregoing.

Pursuant to the terms of each loan, upon the occurrence of a default the Lender may accelerate both loans and declare the obligations immediately due and payable. However, the CT Loan and the CTA III Loan are non-recourse to their respective borrowers, subject to customary non-recourse carve-outs, including but not limited to, certain environmental matters, fraud, waste, misapplication of funds, various special purpose entity covenants, the filing of a voluntary bankruptcy and other similar matters, which non-recourse carve-outs have been guaranteed by the Company’s operating partnership, Prime Group Realty, L.P. The Company is currently not aware of the occurrence of any event that would constitute a non-recourse carve-out on either loan.

Liquidity. We require cash to pay our operating expenses, make capital expenditures, fund tenant improvements and leasing costs, pay distributions/dividends and service our debt and other short-term and long-term liabilities. Cash on hand and net cash provided from asset sales, such as the pending sale of our 180 North LaSalle Street property, represent our primary sources of liquidity to fund these expenditures. In assessing our liquidity, key components include our net income adjusted for non-cash and non-operating items, and current assets and liabilities, in particular accounts receivable, accounts payable and accrued expenses. For the longer term, our debt and long-term liabilities are also considered key to assessing our liquidity.

In order to qualify as a REIT for federal income tax purposes, we must distribute 90.0% of our taxable income (excluding capital gains) annually. As of the first quarter of 2010, we are not current on the payment of dividends on our Series B Shares with a total arrearage in payment of $11.25 million. Our management and Board review our cash position, the status of potential capital events, debt levels and requirements for cash reserves and market conditions each quarter prior to making any decision with respect to paying distributions/dividends. Dividends on our common shares may not be made until all accrued dividends on our Series B Shares are declared and paid or set apart for payment. Future distributions/dividends, including distributions to be paid to the holders of the Series B Shares upon the redemption of such shares, will depend on the actual cash available for distribution, our financial condition, current and future capital requirements, the completion or status of any capital transactions, including refinancings and asset sales, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant.

Our anticipated cash flows from operations combined with cash on hand (including restricted cash escrows) are expected to be sufficient to fund our anticipated short-term capital needs over the next twelve months. In 2010, we anticipate the need to fund significant capital expenditures to retenant and/or redevelop space that has been previously vacated, or is anticipated to be vacated, such as Jenner & Block and Aon Consulting, which together accounted for 19.9% of our 2009 total revenue, or renew leases which are expiring during the year. In order to fund these and our other short-term and long-term capital needs, we expect to utilize available funds from cash on hand, cash generated from our operations and existing or future escrows with lenders and cash generated from capital events, including asset sales. In addition, we may enter into additional capital transactions, which could include additional asset sales, refinancings and modifications or extensions of existing loans. There can be no assurances that any capital transactions will occur or, if they do occur, that they will yield adequate proceeds to fund our long-term capital needs or will be on terms favorable to us. In addition, in the event that any of our properties generate insufficient cash flow to fund such property’s debt service and operating expenses, we may not fund any such shortfalls and may instead convey the property to the relevant property lender pursuant to a deed in lieu of foreclosure transaction or allow the property to be foreclosed on by the lender.

The financial covenants contained in some of our loan agreements and guarantee agreements with our lenders include minimum ratios for debt service coverage and other financial covenants. As of December 31, 2009, we are in compliance with the requirements of all of our financial covenants.

As a requirement of our lenders, we maintain escrow accounts and restricted cash balances for particular uses. At December 31, 2009, these accounts totaled $29.8 million. These escrows relate to $5.0 million in escrow for capital and tenant improvements, $7.5 million in escrow for real estate taxes and insurance, $4.3 million in escrow representing lease obligations, $8.5 million in escrow for depository accounts, $0.2 million in escrow related to environmental remediation and the remaining $4.3 million in escrow for various other purposes.

We believe that the operating plan we have developed for the future year will, if executed successfully, provide sufficient liquidity to finance the Company’s anticipated working capital, escrow and capital expenditure requirements for the next 12 months and maintain compliance with our debt covenants, other than the matters referenced above, for the next twelve months. In addition, we intend to continue our ongoing efforts to improve the Company’s cash flows and improve the Company’s working capital position by re-examining all aspects of the Company’s business for areas of improvement and focusing on minimizing the Company’s property operating expenses so that our operations are responsive to market conditions and we can remain competitive in the leasing of our properties. Our assumptions underlying our operating plan anticipate stabilized net operating income estimated on a consistent basis from the prior year and does not anticipate any catastrophic events such as major tenant defaulting on their leases with us or any material negative resolutions with regard to the contingencies we have disclosed in our financial statements. Should such events occur, we may not have sufficient cash on hand to satisfy such obligations or find replacement tenants in a time period sufficient to fund operations and we may need to sell one or more assets. Additionally, any inability on our part to comply with our financial covenants, obtain waivers for non-compliance or obtain alternative financing to replace the current agreements could have a material adverse effect on our financial position, results of operations and cash flows.

Given our current level of debt, limited availability of unencumbered collateral and our current financing arrangements, we may not be able to obtain additional debt financing, refinance or extend our existing financings or, if we are able to do the foregoing, negotiate terms that are fair and reasonable.

The following tables disclose our contractual obligations and commercial commitments as of December 31, 2009:

		Payments Due by Period
		(dollars in thousands)
										2011/				2013/				2015 and
Contractual Obligations (A)		Total				2010				2012				2014				Thereafter
Mortgage notes payable (B)		$	341,673			$	127,725			$	154,223			$	59,725			$	—
Interest expense on mortgage notes payable			73,074				20,611				24,458				14,883				13,122
Operating lease obligations			2,092				245				450				441				956
Tenant improvement allowances (C)			744				744				—				—				—
Liabilities for leases assumed and lease reimbursement obligations (D)			25,795				10,921				14,874				—				—
Total contractual cash obligations		$	443,378			$	160,246			$	194,005			$	75,049			$	14,078

		Amount of Commitment Expiration Per Period
		(dollars in thousands)
Other Commercial		Total								2011/				2013/				2015 and
Commitments		Committed				2010				2012				2014				Thereafter
Environmental remediation (A)		$	9,676			$	9,205			$	174			$	31			$	266
Series B Shares (B)			9,000				(B	)			(B	)			(B	)			(B	)
Total commercial commitments		$	18,676			$	9,205			$	174			$	31			$	266

Tenant Concentration. The following represents our five largest tenants in 2009 based on gross revenue recognized during 2009:

		Gross
		Tenant				% Of Our Total				Lease
Tenant		Revenue				Revenue				Expiration
		(dollars in thousands)
Jenner & Block (1)		$	12,739				16.3	%		April 2010
Accenture			5,337				6.9			July 2015
Fifth Third Holdings, LLC			3,124				4.0			March 2012
Aon Consulting, Inc. (2)			2,833				3.6			December 2009
Komatsu America Corp.			2,584				3.4			July 2021
		$	26,617				34.2	%

If one or more of the tenants listed above at properties we still own were to experience financial difficulties and cease paying rent or fail to renew their lease at the expiration of its term, our cash flow and earnings would likely be negatively impacted in the near term and possibly the long term. The extent and length of this would be impacted by several factors, including:

•

the nature of the financial difficulties;

•

our ability to obtain control of the space for re-leasing;

•

market conditions;

•

the length of time it would require for us to re-lease the tenant’s space; and

•

whether the tenant’s rent was above or below market.

Property Dispositions. On July 28, 2009, we conveyed the 800-810 Jorie Boulevard property to the lender in exchange for a release of the loan. The Company recorded an asset impairment charge of $6.9 million in the second quarter to reduce the net book value of the property to its estimated fair value and a gain on extinguishment of $8.3 million in the third quarter representing the difference between the extinguished loan balance and accrued interest and the carrying value of the property.

On February 1, 2010 we completed the sale of our 7100 Madison Avenue property for the purchase price of $4.3 million and received net proceeds of $0.5 million.

Preferred Shares. Our Series B Shares rank senior to our common shares as to the payment of dividends and to the extent of their $25.00 per share liquidation preference. Our Series B Shares may be redeemed at our option at a redemption price of $25.00 per share plus accrued and unpaid dividends. The redemption price is payable solely out of the proceeds from our sale of other capital shares of beneficial interest.

On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and a payment date of January 30, 2009.

We announced that our Board determined not to declare a quarterly distribution on our Series B Shares for any of the four quarters of 2009 and first quarter of 2010, and that the Board was unable to determine when and if we will recommence distributions on our Series B Shares. The total arrearage in payment of dividends on the Series B Shares is $11.25 million. The Board is also in the process of considering various financing, capitalization, asset sales and other alternatives for the Company.

Dividends paid in the amount of $0.5625 per share in 2009 on our Series B Shares have been determined to be a return of capital. There can be no assurances as to the timing and amounts of any future dividends on our Series B Shares. The holders of Series B Shares have the right to elect two additional members to our Board if six consecutive quarterly dividends on our Series B Shares are outstanding. The term of any trustees elected by the holders of the Series B Shares will expire whenever the total dividend arrearage on our Series B Shares has been paid and current dividends have been declared and set apart for payment.

Indebtedness. Our aggregate indebtedness had a carrying value of $341.8 million and a face value of $341.7 million at December 31, 2009. This indebtedness had a weighted average maturity of 3.5 years and bore interest at a weighted average interest rate of 6.26% per annum. At December 31, 2009, $330.8 million, or 96.8% of such indebtedness, bore interest at fixed rates, and $11.0 million, or 3.2% of such indebtedness, bore interest at variable rates. None of our variable rate debt is subject to interest rate cap agreements.

Debt Activity. We paid $1.8 million of principal payments during 2009. This amount is exclusive of $1.5 million of principal payments made on behalf of the Company by Lightstone on the PGRT ESH, Inc. (“PGRT ESH”) loan through a capital contribution by Prime Office to the Company and, in turn, to PGRT ESH.

On September 18, 2009, with a transaction effective date of July 16, 2009, PGRT ESH assigned its membership interest in BHAC to LSG-ESH LLC (“LSG-ESH”), an affiliate of the Company’s Chairman of the Board and our parent company, Prime Office. In connection with the transaction, PGRT ESH was released from liability for the obligations under the Citicorp Loan. Due to the related party nature of the transfer of the BHAC interest, including the assumption of the obligations under the Citicorp Loan, this transaction was approved unanimously by our independent trustees and we recorded this transaction as an increase to additional paid-in capital and a reduction of mortgage and notes payable of $80.0 million and a reduction in accrued financing fees included in accounts payable and accrued expenses of $2.1 million.

Capital Improvements. In order to secure new and renewal leases, our properties require an infusion of capital for tenant improvements and leasing commissions. For the years ended December 31, 2009, 2008 and 2007, our tenant improvements and leasing commissions averaged $57.91, $40.78 and $38.88, per square foot, respectively, of newly-leased office space totaling 87,030, 102,314 and 405,680 square feet, respectively, and $3.99, $14.93 and $11.58, per square foot, respectively, of office leases renewed by existing tenants totaling 140,784, 214,756 and 236,752 square feet, respectively. Additionally, for 2009, we incurred $2.1 million of building improvements, excluding discontinued operations, and we expect to incur approximately $0.8 million for 2010.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of December 31, 2009, we are not involved in any unconsolidated SPE transactions and do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on us.

Historical Cash Flows

		Year ended December 31,
		2009				2008				$ Change				% Change
		(dollars in thousands)
Net cash provided by operating activities		$	3,906			$	1,763			$	2,143				121.6	%
Net cash (used in) provided by investing activities		$	(8,008	)		$	79,341			$	(87,349	)			(110.1	)%
Net cash provided by (used in) financing activities		$	559			$	(103,578	)		$	104,137				100.5	%

Cash Flows from Operating Activities. Net cash provided by operating activities was $3.9 million for the year ended December 31, 2009, compared to $1.8 million for the year ended December 31, 2008 — an increase of $2.1 million. This change was primarily due to a $7.8 million decrease in interest payments primarily due to the refinancing and retirement of mortgage notes payable, a $2.2 million increase in the collection of receivables primarily due to timing, a $1.4 million decrease to utilities expense primarily due to favorable weather conditions, a $1.3 million reduction in rent abatements associated with tenants at our 330 N. Wabash Avenue and Continental Towers properties, a $1.1 million decrease in real estate tax payments primarily due to reduced property assessments, a $1.1 million decrease in operating expenses primarily resulting from lower occupancy, and a $0.8 million reduction in employee bonuses. The increase was partially offset by the $6.0 million gain on earnest deposit in 2009 from the cancellation of a sale agreement on our 180 N. LaSalle Street property received in 2008 as a restricted cash deposit, a $1.8 million payment to terminate a tax indemnification agreement related to our Continental Towers property in 2009, the $1.0 million collection of a previously reserved receivable from a tenant at our former 800-810 Jorie Boulevard property in 2008, a $1.0 million decrease in interest income due to lower interest rates and cash balances, a $0.9 million reduction in other income due to the loss of third-party management contracts and a $0.8 million reduction of parking revenues at our 330 N. Wabash Avenue property.

Cash Flows from Investing Activities. Net cash (used in) provided by investing activities was ($8.0 million) for the year ended December 31, 2009 compared to $79.3 million for the year ended December 31, 2008 — a decrease of $87.3 million. In 2008, we received $101.1 million in proceeds from the sale of the real estate and joint venture interests ($51.1 million received from the sale of our joint venture interest in The United Building, $45.9 million for the partial sale of our 330 N. Wabash Avenue property and $4.1 million from the sale of our former 1051 N. Kirk Road property). We had a decrease in capital expenditures of $12.9 million and a decrease in leasing costs of $1.1 million in 2009 compared to 2008.

Cash Flows from Financing Activities. Net cash provided by (used in) financing activities was $0.6 million for the year ended December 31, 2009 compared to ($103.6 million) for the year ended December 31, 2008 — an increase of $104.1 million. In 2008, (i) we refinanced the existing $195.0 million in loans collateralized by our 330 N. Wabash Avenue property with a new $138.0 million loan; (ii) we retired a $14.5 million outstanding first mortgage loan cross-collateralized by two of our properties and replaced it with an $11.6 million first mortgage on our 4343 Commerce Court property; and (iii) retired the outstanding balance of $18.8 million on two Citicorp mezzanine loans and paid $7.5 million in financing costs related to the refinancing transactions including $2.2 million on the PGRT ESH Citicorp Loan. An affiliate of the Company’s Chairman of the Board funded $6.1 million and $12.6 million to pay down principal, interest and other fees on the PGRT ESH Citicorp Loan in 2009 and 2008, respectively. We paid dividends totaling $2.3 million in 2009 compared to $27.0 million in 2008.

		Year ended December 31,
		2008				2007				$ Change				% Change
		(dollars in thousands)
Net cash provided by operating activities		$	1,763			$	7,301			$	(5,538	)			(75.9	)%
Net cash provided by (used in) investing activities		$	79,341			$	(135,867	)		$	215,208				158.4	%
Net cash (used in) provided by financing activities		$	(103,578	)		$	106,348			$	(209,926	)			(197.4	)%

Cash Flows from Operating Activities. Net cash provided by operating activities was $1.8 million for the year ended December 31, 2008, compared to $7.3 million for the year ended December 31, 2007 — a decrease of $5.5 million. This change was primarily due to: a $6.6 million reduction of tenant receipts due to lower occupancy at our 330 N. Wabash Avenue, Continental Towers and 800-810 Jorie Boulevard properties; a $6.2 million preferential return received in 2007 from our investment in the unconsolidated entity that owns ESH that was suspended in 2008; a $3.1 million increase in rents received in advance in 2007; a $2.2 million decrease in Services Company revenues; a $1.5 million decrease in interest income due to lower interest rates and cash balances; and a $1.1 million refund of real estate taxes received in 2007 associated with a former owned property. The decrease was partially offset by the $6.0 million earnest money received related to the sale of our 180 N. LaSalle Street property; a $4.0 million decrease in interest payments primarily due to the refinancing and retirement of mortgage notes payable; a $1.5 million decrease in real estate taxes paid; a $1.4 million reduction in property operating expenses due to the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008; a $1.3 million decrease in Services Company operations in 2008; the collection of a $1.0 million previously reserved receivable from a former tenant at our 800-810 Jorie Boulevard property in 2008; and a $0.9 million lease termination fee received in 2008 from a tenant at our 180 N. LaSalle Street property.

Cash Flows from Investing Activities. Net cash provided by (used in) investing activities was $79.3 million for the year ended December 31, 2008 compared to $(135.9) million for the year ended December 31, 2007 — an increase of $215.2 million. In 2007, we invested $120.0 million in a membership interest in the unconsolidated entity that owns ESH. In 2008, we received $101.1 million in proceeds from the sale of real estate and joint venture interests ($51.1 million received from the sale of our joint venture interest in The United Building, $45.9 million from the partial sale of our 330 N. Wabash Avenue property and $4.1 million from the sale of our former 1051 N. Kirk Road property). This increase was partially offset by proceeds of $4.7 million related to the sale of our Narco River property received during 2007. Also, an additional $5.1 million was spent on real estate and equipment in 2008 compared to 2007.

Cash Flows from Financing Activities. Net cash (used in) provided by financing activities was $(103.6) million for the year ended December 31, 2008 compared to $106.3 million for the year ended December 31, 2007 — a decrease of $209.9 million. During 2008, (i) we retired the existing $195.0 million in loans collateralized by our 330 N. Wabash Avenue property and refinanced the property with a new $138.0 million loan, (ii) we retired a $14.5 million outstanding first mortgage loan cross-collateralized by two of our properties and replaced it with an $11.6 million first mortgage on our 4343 Commerce Court property, and (iii) retired the outstanding balance of $18.8 million on two Citicorp mezzanine loans. In June 2007, we received $120.0 million in loan proceeds on a non-recourse loan (related to our investment in ESH) from Citicorp and retired $38.5 million of this debt during 2008. Affiliates of Lightstone funded $49.9 million to pay down principal and interest on the Citicorp Loan in 2008; no amounts were funded during 2007. We paid dividends and distributions to our common share/unit holder totaling $18.0 million in 2008; no amounts were funded during 2007. We also paid $9.0 million in dividends to our preferred shareholders in 2008 and $11.3 million in 2007. We paid $7.5 million and $0.7 million in financing costs during 2008 and 2007, respectively.

Critical Accounting Policies

General. The previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain, including but not limited to assumptions regarding our ability to continue conducting our operations in substantially the same manner as we historically have. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management’s most difficult, subjective or complex judgments.

Consolidation. Our consolidated financial statements include our accounts, variable interest entities (“VIEs”) in which we are the primary beneficiary and other subsidiaries over which we have control. Our determination of the appropriate accounting method with respect to our variable interests is in accordance with U.S. GAAP. We consolidate any VIE of which we are the primary beneficiary and disclose significant variable interests in VIEs of which we are not the primary beneficiary. We determine if an entity is a VIE based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support provided by any parties, including equity holders. We make judgments regarding the sufficiency of the equity at risk based first on qualitative analysis, then quantitative analysis if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, we then determine whether we will absorb the majority of expected losses and/or receive the majority of expected returns, and if so, consolidate the entity as the primary beneficiary. This determination of whether we will absorb the majority of expected losses and/or receive the majority of expected returns includes any impact of an “upside economic interest” in the form of a “promote” that we may have. A promote is a disproportionate interest built into the distribution structure of the entity based on the entity’s achievement of certain return hurdles. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not to consolidate such entity. We are not required to reconsider the entity’s VIE status if the entity incurs losses that exceed expectations, but are required to reconsider the status if the structure of the entity changes.

Our determination of the appropriate accounting method for all other investments in subsidiaries, including those that are not primary beneficiary interests in VIEs, is based on the amount of control or influence we have (considering our ownership interest) in the underlying entity. We consolidate those other subsidiaries over which we exercise control. Those other investments in subsidiaries where we have the ability to exercise significant influence (but not control) over operating and financial policies of such subsidiaries (including certain subsidiaries where we have less than 20% ownership) are accounted for using the equity method.

Tenant Reimbursements. Estimates are used to record cost reimbursements from tenants for real estate taxes and operating expenses. We recognize revenue based upon the amounts to be reimbursed from our tenants in the same period these reimbursable expenses are incurred. Differences between estimated recoveries and final amounts billed are recognized in the subsequent year. Leases are not uniform in dealing with such cost reimbursements and variations exist in computations between properties and tenants. Adjustments are also made throughout the year to these receivables and the related cost recovery income based upon our best estimate of the final amounts to be billed and collected. We analyze the balance of the estimated accounts receivable for real estate taxes and operating expenses for each of our properties by comparing actual recoveries versus actual expenses.

Accounts Receivable and Allowance for Doubtful Accounts. We monitor the liquidity and creditworthiness of our tenants on an ongoing basis. We maintain allowances for doubtful accounts using the specific identification method for estimated losses resulting from the inability of certain of our tenants to make payments required by the terms of their respective leases. If the financial condition of our tenants were to deteriorate, additional allowances may be required.

Assumed Lease Liabilities. As a result of the negotiation of certain leases, we assumed the liability for the tenants’ obligation or agreed to reimburse the tenants for their obligation under leases with their prior landlords. Our policy is to record the estimated net obligation we may be subject to as a liability. The net obligation is derived by calculating our total contractual obligation and reducing the amount by existing subleases and an estimate of subleases we anticipate signing in the future based on the nature of the space, the property and market conditions. We periodically review these estimates for reasonableness based on changes in market conditions and executed subleases. Failure to achieve forecasted results could lead to a future increase in the liabilities associated with these transactions.

Depreciation and Amortization. Depreciation expense for real estate assets is computed using the straight-line method over the estimated useful lives of the assets: forty years for the composite life of buildings and improvements and five to ten years for equipment and fixtures. Expenditures for leasehold improvements and construction allowances paid to tenants are capitalized and amortized over the initial term of each lease.

Impairment of Long-Lived Assets. In evaluating our assets for impairment, we record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired. Assets that display indicators of possible impairment are reviewed to see if their net book value will be recovered from estimated undiscounted cash flows over an anticipated hold period. If these undiscounted cash flows, plus the proceeds from a sale at the end of the anticipated hold period, are less than the net book value of the related asset, our policy is to record an impairment reserve related to the asset in the amount of the difference between its net book value and our estimate of its fair market value, less costs of sale. For assets held for sale, impairment is measured as the difference between carrying value and fair value, less cost to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of interest.

Property Held for Sale. We evaluate held for sale classification of our owned real estate on a quarterly basis. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are generally classified as held for sale once a sales contract is executed with no contingencies and the prospective buyer has funds at risk to ensure performance. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported.

Inflation

Substantially all of our office leases require tenants to pay, as additional rent, a portion of real estate taxes and operating expenses. In addition, many of our leases provide for fixed increases in base rent or indexed escalations (based on the Consumer Price Index or other measures). We believe that inflationary increases in expenses will be offset, in part, by the expense reimbursements and contractual rent increases described above.

As of December 31, 2009, approximately $11.0 million of our outstanding indebtedness was subject to interest at floating rates. Future indebtedness may also be subject to floating rate interest. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on such indebtedness. None of our floating rate debt is subject to interest rate cap agreements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following table provides information about our financial instruments that are sensitive to changes in interest rates. For our mortgage notes payable, the table presents principal cash flows, including principal amortization, and related weighted-average interest rates by expected maturity dates as of December 31, 2009.

		Interest Rate Sensitivity
		Principal (Notional) Amount by Expected Maturity
		Average Interest Rate
		2010				2011				2012				2013				Total
Liabilities
Mortgage notes payable (1):
Fixed rate amount — Face Value		$	127.3			$	153.4			$	—			$	50.0			$	330.7
Weighted-average interest rate — Face Value			6.1	%			5.8	%			—				8.0	%			—
Fixed rate amount — Carrying Value		$	127.4			$	153.4			$	—			$	50.0			$	330.8
Weighted-average interest rate — Carrying Value			6.1	%			5.8	%			—				8.0	%			—
Variable rate amount		$	0.4			$	0.4			$	0.4			$	9.8			$	11.0
Weighted-average interest rate			4.5	%			4.5	%			4.5	%			4.5	%			—

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management evaluated, under the supervision and with the participation of our Chief Executive Officer and our Executive Vice President—Capital Markets, the officer currently performing the function of our principal financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based on that evaluation, our Chief Executive Officer and Executive Vice President—Capital Markets concluded that, as of December 31, 2009, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), were effective.

(b) Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our system of internal control over financial reporting is designed to provide reasonable assurance to our management and our Board regarding the preparation and fair presentation of published financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.

Based on our assessment, we believe that, as of December 31, 2009, our system of internal control over financial reporting was effective.

This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

(c) Changes in Internal Control over Financial Reporting.

There have not been any changes in our internal control over financial reporting during our last fiscal quarter within the fiscal year to which this annual report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Trustees

The following table presents certain information as of March 20, 2010 concerning each of our trustees serving in such capacity:

				Principal		Year Term of		Served as a
				Occupation and		Office Will		Trustee
Name		Age		Positions Held		Expire		Since
David Lichtenstein		49		Chairman of the Board		2010		2005
Jeffrey A. Patterson		50		President and Chief Executive Officer, Trustee		2010		2005
Peyton Owen, Jr.		52		Trustee		2010		2007
John M. Sabin		55		Independent Trustee		2010		2005
Shawn R. Tominus		51		Independent Trustee		2010		2005
Bruno de Vinck		64		Trustee		2010		2005
George R. Whittemore		60		Independent Trustee		2010		2005

David Lichtenstein. Mr. Lichtenstein has served as our Chairman of the Board since July 2005. David Lichtenstein founded The Lightstone Group in 1988 and has led Lightstone’s growth into one of the largest privately-held real estate companies in the United States today. The Lightstone Group is now ranked among the 25 largest real estate companies in the industry with a diversified portfolio of approximately 18,000 residential units and approximately 30 million square feet of office, industrial and retail properties in 27 states, the District of Columbia and Puerto Rico. The Lightstone Group owns Prime Group Realty Trust, Prime Retail Inc. and Extended Stay Hotels, the largest, mid-price extended-stay hotel company in the United States, with 687 hotels and approximately 76,000 rooms located in 44 states and Canada. Headquartered in New York, The Lightstone Group has over 14,000 employees and maintains regional offices in Maryland, Illinois and New Jersey. Mr. Lichtenstein is a member of the International Council of Shopping Centers. Mr. Lichtenstein is the Chairman of the board of directors of Extended Stay Inc. and Prime Retail, Inc., all private companies, and is Chief Executive Officer, President and Chairman of the board of trustees of Lightstone Value Plus Real Estate Investment Trust, Inc. and Lightstone Value Plus Real Estate Investment Trust II, Inc., each, a public company.

Jeffrey A. Patterson. Mr. Patterson has served as our President and Chief Executive Officer since August 2004 and has served on our Board since February 2005. From October 2003 until August 2004, Mr. Patterson served as our President and Chief Investment Officer. From June 2000 to October 2003, Mr. Patterson served as our Co-President and Chief Investment Officer. From November 1997 to June 2000, Mr. Patterson served as our Executive Vice President and Chief Investment Officer. In his current capacity, Mr. Patterson oversees our strategic direction and performance, including acquisitions, dispositions, joint ventures and development oversight. Mr. Patterson is also responsible for the asset management, operations, leasing and marketing activities for our properties. From 1989 to November 1997, Mr. Patterson was Executive Vice President of The Prime Group, Inc., with primary responsibility for the acquisition, financing and redevelopment of office and mixed-use properties. Mr. Patterson was also in charge of the overall operations of The Prime Group, Inc.’s office properties, and has provided real estate advisory services for several major institutional investors. Prior to joining The Prime Group, Inc., Mr. Patterson served as Director of Development in Tishman Speyer Properties’ Chicago office and as a Senior Financial Analyst at Metropolitan Life Insurance Company’s Real Estate Investment Group.

Peyton (Chip) Owen, Jr. Mr. Owen joined The Lightstone Group in 2007 as President and Chief Operating Officer after three years as chief operating officer of Equity Office Properties Trust, based in Chicago. Prior to Equity Office, Mr. Owen spent almost 20 years at Chicago’s Jones Lang LaSalle, most recently as chief operating officer, Americas Region. Mr. Owen has more than 25 years of real estate leasing, property management and investment experience. He has served on the board of Extended Stay Hotels since 2007 and previously served on the boards of Metropolitan Family Services based in Chicago and the University of Virginia Engineering Foundation, both non-profits. Mr. Owen holds a Bachelor of Science in mechanical engineering and a Master in Business Administration from the University of Virginia.

John M. Sabin. Mr. Sabin has served on our Board since July 2005. Mr. Sabin is currently the Chief Financial Officer and General Counsel of Phoenix Health Systems, Inc. He also serves on the board of Hersha Hospitality Trust since 2003, a publicly traded company. Additionally, during the past five years Mr. Sabin has also served on the boards of Competitive Technologies, Inc. (from 1996 to 2007) and North American Scientific, Inc. (from 2005 to 2009). From January 2000 to October 2004, Mr. Sabin was the Chief Financial Officer, General Counsel and Secretary of NovaScreen Biosciences Corporation, a private bioinformatics and contract research biotech company. Prior to joining NovaScreen, Mr. Sabin served as a finance executive with Hudson Hotels Corporation, Vistana, Inc., Choice Hotels International, Inc., Manor Care, Inc. and Marriott International, Inc. In his professional life Mr. Sabin has had commercial lease experience with a national law firm, transactional real estate experience with national hospitality and health care firms, commercial real estate financing experience, as well as experience as an audit committee member of other public companies. Mr. Sabin has received Bachelor of Science degrees in Accounting and in University Studies; a Masters of Accountancy and a Masters in Business Administration from Brigham Young University, and he also received a Juris Doctor from the J. Reuben Clark Law School at Brigham Young University. Mr. Sabin is a licensed CPA and is admitted to the bar in several states.

Shawn R. Tominus. Mr. Tominus has served on our Board since July 2005. Mr. Tominus is the founder and has served as the President of Metro Management, a real estate investment and management company, which specializes in the acquisition, financing, construction and redevelopment of residential, commercial and industrial properties, since 1994. Mr. Tominus is also a director of The Lightstone Value Plus Real Estate Investment Trust, Inc. and The Lightstone Value Plus Real Estate Investment Trust II, Inc., both public companies. Mr. Tominus is currently responsible at Metro Management for the ownership, management and development of assets in excess of $50,000,000. Mr. Tominus has over 25 years experience in real estate, including in the areas of management, acquisitions, construction and redevelopment and also acts as a national consultant primarily focusing on market and feasibility analysis. Prior to Metro Management, Mr. Tominus held the position of Senior Vice President at Kamson Corporation where he managed a portfolio of over 5,000 residential units as well as commercial and industrial properties. Mr. Tominus holds numerous professional certifications including from the Institute of Real Estate Management and the International Council of Shopping Centers.

Bruno de Vinck. Mr. de Vinck has served on our Board since July 2005. Mr. de Vinck is the Chief Operating Officer, Senior Vice President, Secretary and a director of The Lightstone Value Plus Real Estate Investment Trust, Inc., a public company, the Secretary and a director of The Lightstone Value Plus Real Estate Investment Trust II, Inc., a public company, and a director of Extended Stay Inc., a private company. Mr. de Vinck was also a director of the Park Avenue Bank New York City, a private company, from 2005 through 2010. Mr. de Vinck is also involved in the management and renovation of various multi-family, retail and industrial properties for The Lightstone Group and has served as its Senior Vice President since April 1994. Prior to this, Mr. de Vinck was a manager with numerous real estate management companies since 1973, and was the founding president and Chairman of the Ramsey Homestead Corp., a not-for-profit senior citizen residential health care facility. Mr. de Vinck is a past New Jersey chapter president for the Institute of Real Estate Management (IREM), as well as a past Director of the New Jersey Association of Realtors.

George R. Whittemore. Mr. Whittemore has served on our Board since July 2005. Mr. Whittemore has extensive experience in accounting, banking, finance and real estate. Mr. Whittemore currently serves as a director of The Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus Real Estate Investment Trust II, Inc., Village Bank & Trust in Richmond, Virginia, and Supertel Hospitality, Inc. in Norfolk, Nebraska, all public companies. Mr. Whittemore previously served as President and CEO of Supertel Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as a director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation from September 1982 until August 1994, when these institutions were acquired by a merger with Signet Banking Corporation (now Wachovia Corporation), and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Prior to that, Mr. Whittemore was the treasurer of Pioneer Federal Savings Bank from 1975 through 1985. Mr. Whittemore started his career in public accounting with Ernst & Ernst (the predecessor company of Ernst & Young LLP) and received his CPA certificate from the State of Virginia in 1975.

Certain Proceedings Regarding Trustees

Mr. Lichtenstein is the founder and owner of Lightstone and serves as a director and/or executive officer of certain of its affiliates, and Mr. de Vinck is a Senior Vice President of Lightstone and serves as a director and/or executive officer of certain of its affiliates. Certain of Lightstone’s direct or indirect affiliates at the property-ownership level, which are not subsidiaries of PGRT or our Operating Partnership, have had receivers appointed in connection with the exercise by mortgage holders of their remedies relating to the non-payment of loans affecting the relevant properties. In addition, affiliates of Lightstone (i) consisting of an entity which owns extended stay hotel properties, filed for bankruptcy in the United States Bankruptcy Court for the Southern District of New York in June 2009, and (ii) consisting of a private bank headquartered in New York City, was closed by the New York State Banking Department on March 12, 2010 and a receiver appointed, neither of which entities are subsidiaries of PGRT or our Operating Partnership.

Executive Officers

The following table presents certain information as of March 20, 2010 concerning each of our executive officers and key employees serving in such capacities:

Name		Age		Position
David Lichtenstein		49		Chairman of the Board
Jeffrey A. Patterson		50		President and Chief Executive Officer, Trustee
James F. Hoffman		47		Senior Executive Vice President—General Counsel and Secretary
Steven R. Baron		61		Executive Vice President—Leasing
Paul G. Del Vecchio		45		Executive Vice President—Capital Markets
Victoria A. Cory		45		Senior Vice President—Loan Administration, Real Estate Tax and Due Diligence
Anita T. Pallardy		51		Senior Vice President—Leasing

David Lichtenstein. Mr. Lichtenstein has served as our Chairman of the Board since July 2005. David Lichtenstein founded The Lightstone Group in 1988 and has led Lightstone’s growth into one of the largest privately-held real estate companies in the United States today. The Lightstone Group is now ranked among the 25 largest real estate companies in the industry with a diversified portfolio of approximately 18,000 residential units and approximately 30 million square feet of office, industrial and retail properties in 27 states, the District of Columbia and Puerto Rico. The Lightstone Group owns Prime Group Realty Trust, Prime Retail Inc. and Extended Stay Hotels, the largest, mid-price extended-stay hotel company in the United States, with 687 hotels and approximately 76,000 rooms located in 44 states and Canada. Headquartered in New York, The Lightstone Group has over 14,000 employees and maintains regional offices in Maryland, Illinois and New Jersey. Mr. Lichtenstein is a member of the International Council of Shopping Centers. Mr. Lichtenstein is the Chairman of the board of directors of Extended Stay Inc. and Prime Retail, Inc., all private companies, and is Chief Executive Officer, President and Chairman of the board of trustees of Lightstone Value Plus Real Estate Investment Trust, Inc. and Lightstone Value Plus Real Estate Investment Trust II, Inc., each, a public company.

Jeffrey A. Patterson. Mr. Patterson has served as our President and Chief Executive Officer since August 2004 and has served on our Board since February 2005. From October 2003 until August 2004, Mr. Patterson served as our President and Chief Investment Officer. From June 2000 to October 2003, Mr. Patterson served as our Co-President and Chief Investment Officer. From November 1997 to June 2000, Mr. Patterson served as our Executive Vice President and Chief Investment Officer. In his current capacity, Mr. Patterson oversees our strategic direction and performance, including acquisitions, dispositions, joint ventures and development oversight. Mr. Patterson is also responsible for the asset management, operations, leasing and marketing activities for our properties. From 1989 to November 1997, Mr. Patterson was Executive Vice President of The Prime Group, Inc., with primary responsibility for the acquisition, financing and redevelopment of office and mixed-use properties. Mr. Patterson was also in charge of the overall operations of The Prime Group, Inc.’s office properties, and has provided real estate advisory services for several major institutional investors. Prior to joining The Prime Group, Inc., Mr. Patterson served as Director of Development in Tishman Speyer Properties’ Chicago office and as a Senior Financial Analyst at Metropolitan Life Insurance Company’s Real Estate Investment Group.

James F. Hoffman. Mr. Hoffman has served as our Senior Executive Vice President—General Counsel and Secretary since February 2007. From October 2000 to February 2007, Mr. Hoffman served as our Executive Vice President—General Counsel and Secretary. Mr. Hoffman obtained his law degree in 1987 from Harvard Law School where he graduated Cum Laude and obtained his finance degree in 1984 from the University of Illinois where he graduated with Highest Honors. From March 1998 to October 2000, Mr. Hoffman served as our Senior Vice President—General Counsel and Secretary and before that as our Vice President and Associate General Counsel. Prior to working for us, Mr. Hoffman served as Assistant General Counsel of our predecessor company, The Prime Group, Inc., and was an associate with the law firm of Mayer, Brown & Platt (now Mayer Brown LLP).

Steven R. Baron. Mr. Baron serves as our Executive Vice President-Office Leasing. Mr. Baron is involved in overseeing the leasing and performing asset management and development services in connection with the 1407 Broadway Avenue building in New York. He also oversees all the leasing activity for our suburban portfolio of properties. Mr. Baron has previously served as the Executive Vice President in charge of our Industrial Group, responsible for overseeing the leasing and build to suit development and served as our Senior Vice President-Development and Leasing, where he was responsible for the oversight of our redevelopment of the 180 North LaSalle Street building in Chicago, Illinois. Previous to the 180 North LaSalle redevelopment project, Mr. Baron was the senior leasing executive responsible for the overall leasing activity of the Company’s Chicago central business district portfolio. Prior to joining Prime Group Realty Trust, Mr. Baron held senior leasing and/or development positions with The Prime Group, Inc., Metropolitan Structures, Inc., and Stein & Co. where he leased over 7 million square feet of CBD office space. Mr. Baron is a licensed real estate broker and has taught at DePaul University and Kellogg School of Management at Northwestern University, where he lectured on commercial real estate development, leasing and marketing.

Paul G. Del Vecchio. Mr. Del Vecchio serves as our Executive Vice President—Capital Markets. From April 2003 to February 2007, Mr. Del Vecchio served as our Senior Vice President—Capital Markets. From February 2000 to April 2003, Mr. Del Vecchio served as our Vice President—Capital Markets and from November 1998 to February 2000, Mr. Del Vecchio served as our Assistant Vice President—Capital Markets. Prior to joining us, Mr. Del Vecchio was an Assistant Vice President for Prime Capital Funding LLC from October 1997 to August 1998. Mr. Del Vecchio is a licensed real estate broker and a certified public accountant.

Victoria A. Cory. Ms. Cory serves as our Senior Vice President—Loan Administration, Real Estate Tax and Due Diligence. From April 2000 to February 2006, Ms. Cory served as our Vice President—Loan Administration, Real Estate Tax and Due Diligence. Prior to joining us, Ms. Cory was the Senior Vice President—Loan Administration for Prime Capital Funding LLC from January 1998 until March 2000.

Anita T. Pallardy. Ms. Pallardy serves as our Senior Vice President—Leasing, CBD, overseeing the leasing and marketing of our 180 North LaSalle Street and 330 North Wabash Avenue properties. From March 2001 to November 2006, Ms. Pallardy served as our Vice President—Leasing, CBD, and from May 1998 to February 2001 served as Portfolio Leasing Manager, CBD. Prior to joining us, Ms. Pallardy served as Vice President, Leasing for The John Buck Company, in Chicago, Illinois.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and trustees, and persons who own more than ten percent of a registered class of our equity securities, to file reports of the ownership and changes in the ownership (Forms 3, 4 and 5) with the SEC and the NYSE. Officers, trustees and beneficial owners of more than ten percent of our equity securities are required by SEC regulations to furnish us with copies of all such forms which they file.

Based solely on our review of the copies of Forms 3, 4 and 5 and the amendments thereto received by it for the year ended December 31, 2009, or written representations from certain reporting persons that no Forms 3, 4 or 5 were required to be filed by those persons, to our knowledge, no transactions were reported late during the year ended December 31, 2009.

Code of Ethics

We have adopted a code of ethics that applies to all employees, including but not limited to our President and Chief Executive Officer (our principal executive officer), Executive Vice President—Capital Markets (our principal financial officer) and Vice President—Corporate Accounting (our principal accounting officer), and other persons that may perform similar functions from time to time. Our code of ethics is published on our website at www.pgrt.com. In addition our code of ethics is available in print to any shareholder who requests it from our investor relations representative c/o Prime Group Realty Trust, Investor Relations Representative, 330 North Wabash Avenue, Suite 2800, Chicago, Illinois 60611. In the event that any future amendment to, or waiver from, a provision of our code of ethics would otherwise require disclosure under Item 5.05 of Form 8-K, we intend to satisfy that disclosure requirement by posting such amendment or waiver on our website.

Information Regarding Audit Committee

Our Board has established an audit committee. The charter of our audit committee is available on our web site at www.pgrt.com. Since July 1, 2005 the audit committee has consisted of Messrs. Sabin, Tominus and Whittemore, each of whom is “independent” within the meaning of the NYSE listing standards. Mr. Whittemore was named chairman of the audit committee on July 1, 2005. The Board determined that Messrs. Whittemore and Sabin are qualified as audit committee financial experts as defined in Item 407(d) of Regulation S-K. For more information regarding Messrs. Whittemore and Sabin’s relevant professional experience, see “—Trustees”.

Information Regarding Compensation Committee (or equivalent)

Because only our Series B Shares are listed on the NYSE, we are not required to have a separate compensation committee of the Board under applicable NYSE listing requirements. Likewise, we are not required to have and do not operate under a compensation charter. We believe it is appropriate for us not to have a compensation committee or compensation charter because our common shares are not publicly traded and our common shares are wholly owned and we are controlled by an affiliate of Lightstone, a private company.

The members of our Board’s Executive Committee, consisting of Mr. Lichtenstein, our Chairman, Mr. Patterson, our President and Chief Executive Officer and Mr. Owen, a member of our Board, periodically review our compensation practices. Our compensation program consists of a base salary and opportunity to receive a cash bonus for our executive officers, and fees for our trustees. No cash bonuses were paid to our executive officers for 2009. Fees for our trustees are unchanged for calendar years 2008 and 2009. Mr. Patterson’s base salary for 2009 was set pursuant to the terms of his employment agreement, which was previously approved by our Board.

We did not engage a compensation consultant to assist us in determining compensation for calendar year 2009.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Our compensation philosophy is based on aligning management’s business objectives with those of our shareholders in order to provide compensation that will enable us to attract and retain talented executives, and link the interests of our executive officers to those of our shareholders. Accordingly, the employment agreement for Jeffrey A. Patterson, our President and Chief Executive Officer, provides that annual bonuses may be earned by him based on increases in the net operating income of our properties. In addition, Mr. Patterson had an option through the end of 2009 which allowed him to acquire membership interests in Prime Office on similar terms as our existing shareholder’s other initial equity investors. Finally, a significant portion of the compensation of our leasing personnel is directly tied to the execution of leases at our properties. Annual salary increases and bonuses for our other officers and employees are determined based upon a review of their individual performance and the performance of their relevant departments during the year.

We believe that, through the foregoing employment agreements and arrangements, the financial interests of our President and Chief Executive Officer and key executives are as a whole aligned with the interests of our shareholders. Throughout 2009, we had employment agreements with certain of our senior executives. See “ — Employment Agreements” for more information regarding these employment agreements.

Mr. Patterson was named the Company’s President and Chief Executive Officer in August 2004, prior to the Acquisition. Mr. Patterson’s annual base salary was $463,710 for calendar year 2009 and pursuant to the terms of his employment agreement was increased by 3% to $477,621 for calendar year 2010. Mr. Patterson did not receive an annual bonus for 2009.

In general, executive officers, including our President and Chief Executive Officer, are eligible for, and participate in, our compensation and benefits programs according to the same general terms as those available to all of our employees. For example, the health and welfare benefit programs are the same for all of our employees, including our executive officers, and executive officers participate in the same 401(k) Plan, according to the same terms, as all of our employees.

Each element of the compensation program is intended to target compensation levels at rates that take into account current market practices. Offering market-comparable pay opportunities is designed to allow us to maintain a stable, successful management team. Our market for compensation comparison purposes is comprised of a group of companies that own, manage, lease, develop and redevelop office and industrial real estate primarily in the Chicago metropolitan area. In evaluating this comparison group for compensation purposes, discretion is exercised and judgments made after considering relevant factors.

The key elements of our executive compensation program for executive officers are base salary and annual cash bonuses. Each of these is addressed separately below. In determining initial compensation for executive officers, the company’s management considers all elements of an executive officer’s total compensation package in comparison to current market practices, ability to participate in savings plans and other benefits. On at least an annual basis, members of our Board’s Executive Committee consider each executive officer’s overall compensation, and determine if such executive officer is entitled to receive a year-end cash bonus and if so, the amount of the cash bonus.

Base Salaries. Base salaries for executive officers are initially determined by evaluating the executive’s levels of responsibility, prior experience, breadth of knowledge, internal equity issues and external pay practices, with particular reference to the market in the Chicago metropolitan area. Increases to base salaries are driven by performance and market conditions, and evaluated based on sustained levels of contribution to the company by the relevant executive.

Annual Cash Bonuses. All of the Company’s employees are eligible to participate in the Company’s cash bonus program, with executive officer bonuses determined as described above. The cash bonus program allows us to communicate specific goals that are of primary importance during each year and motivates executives to achieve these goals. Because of the poor economic conditions in the real estate industry for calendar year 2009, except for certain leasing related bonuses to our leasing personnel, we did not pay discretionary bonuses for calendar year 2009.

Summary Compensation Table

The following table sets forth the compensation earned for the years ended December 31, 2009 and 2008 with respect to Mr. Patterson (our President and Chief Executive Officer), Mr. Del Vecchio (our Executive Vice President—Capital Markets and our principal financial officer) and the three other persons who were our most highly compensated executive officers during 2009 (the “Named Executive Officers”).

																		All Other
														Option				Compen-
						Salary				Bonus				Awards				sation
Name and Principal Position		Year				($) (1)				($) (1)(2)				($) (3)				($) (4)				Total ($)
Jeffrey A. Patterson			2009				463,710				0				0				5,500				469,210
President and Chief			2008				449,657				250,000				106,000				5,500				811,157
Executive Officer
James F. Hoffman			2009				260,075				0				0				5,500				265,575
Senior Executive Vice			2008				252,083				110,000				0				5,500				367,583
President—General Counsel and Secretary
Paul G. Del Vecchio			2009				206,000				0				0				5,500				211,500
Executive Vice President—			2008				199,167				60,000				0				5,500				264,667
Capital Markets
Steven R. Baron			2009				170,000				30,383				0				4,521				204,904
Executive Vice			2008				170,000				178,175				0				5,500				353,675
President—Leasing
Anita T. Pallardy			2009				132,500				53,080				0				3,211				188,791
Senior Vice President—			2008				132,500				188,045				0				3,312				323,857
Leasing

Employment Agreements

On June 1, 2005, Prime Office entered into employment agreements dated as of May 31, 2005 with Jeffrey A. Patterson, our President and Chief Executive Officer, and James F. Hoffman, our Senior Executive Vice President, General Counsel and Secretary. On July 1, 2005, in connection with the completion of the Acquisition, we and the Operating Partnership adopted and assumed the two employment agreements.

On December 31, 2008, we entered into amendments to the employment agreements dated as of May 31, 2005 with Jeffrey A. Patterson, our President and Chief Executive Officer, and James F. Hoffman, our Senior Executive Vice President, General Counsel and Secretary (the “Executives”). The amendments were entered into solely to make the necessary changes to the employment agreements in order to comply with the terms of the recently adopted Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The transition period for Code Section 409A ended on December 31, 2008 and it was necessary for the two amendments to be finalized by the end of the transition period.

The amendments generally add additional Code imposed obligations on the part of the Executives such as adding required notice and cure periods benefiting the Company and limiting the events for which the Executives can terminate the agreements for “good reason”. The modifications include: (i) requiring that prior to terminating the employment agreements because of a default by the Company, the Executives must first provide written notice to the Company specifying in reasonable detail the nature of the defaults within 90 days after the initial existence of such defaults and that the Company shall have 30 days to cure such default, and (ii) eliminating the right of the Executives to unilaterally terminate the Agreement upon the occurrence of a change of control of the Company. The two amendments do not modify the terms of the Company’s previously disclosed retention and severance program, which is described below.

The employment agreements provided for initial base salaries of $412,000 and $226,600, respectively, and increasing each year thereafter by no less than three percent. Further, the employment agreements of both Messrs. Patterson and Hoffman provide for the opportunity for the executives to earn annual bonus compensation as set forth in the respective employment agreement. Mr. Patterson’s agreement provides for an annual bonus based on increases in the net operating income for our properties, subject to a minimum annual bonus of $500,000 for calendar years 2005, 2006 and 2007, and for discretionary bonuses thereafter. The employment agreements each have an initial thirty month term and automatically renew for successive one year terms, unless either party gives written notice of termination to the other party.

The employment agreements provide that if either agreement is terminated by (i) us “without cause” (as defined in the agreements), (ii) us in the event of the executive’s “disability” (as defined in the agreements), (iii) the respective executive within specified time periods following the occurrence of a “change of control” and (a) a resulting “diminution event” (as each term is defined in the agreements) or (b) a resulting relocation of the respective executive’s office to a location more than twenty-five miles from its current location, (iv) by the respective executive for “good reason” (as defined in the agreements) or (v) automatically upon the respective executive’s death, the applicable executive shall be entitled to a pro rata portion of any bonus compensation otherwise payable to executive for or with respect to the calendar year in which the termination occurs and a lump sum termination payment equal to the aggregate base compensation payable to the executive over the remainder of the employment term as in effect immediately prior to the effective date of the termination.

Assuming on December 31, 2009 Mr. Patterson’s employment with us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr. Patterson’s severance pursuant to his employment agreement would be $477,621, which is the bonus compensation payable to Mr. Patterson with respect to the calendar year 2009 and the aggregate base compensation payable to Mr. Patterson through December 31, 2010. Assuming on December 31, 2009 Mr. Hoffman’s employment with us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr. Hoffman’s severance pursuant to his employment agreement would be $267,877, which is based on and includes the bonus compensation payable to Mr. Hoffman with respect to the calendar year 2009 and the aggregate base compensation payable to Mr. Hoffman through December 31, 2010. There are no material conditions to receipt by the executives of these termination benefits. The amount and terms of these severance arrangements was determined by Prime Office, and included consideration of market practices for other similar officers of comparable companies.

The employment agreements also subject the executives to certain confidentiality obligations and non-solicitation restrictions, and in the case of Mr. Patterson certain non-competition restrictions, all as more fully set forth in the agreements. Mr. Patterson’s agreement also granted him an option for eighteen months after the closing date of the Acquisition to acquire membership interests in Prime Office equivalent to a 3.5% ownership interest in the Operating Partnership and us. Pursuant to a letter agreement dated March 15, 2007, between Mr. Patterson and Prime Office, Mr. Patterson and Prime Office agreed to extend the exercise period for the option to the earlier of the occurrence of a change of control involving the Company or December 31, 2007. This option expired on December 31, 2007. In January 2008, Mr. Patterson and Prime Office, entered into an Equity Option Agreement dated as of December 31, 2007, granting Mr. Patterson an option to acquire either directly or through equity ownership in Prime Office up to 3.5% of the equity interests in the Company and the Operating Partnership pursuant to the terms set forth in such agreement (the “Equity Interest”). This option expired on December 31, 2008. As of December 31, 2008, Mr. Patterson entered into a new Equity Option Agreement granting Mr. Patterson the right to acquire the Equity Interest. The purchase price for the Equity Interest was on substantially the same economic terms as the class, price and economic terms applicable to Prime Office’s other initial equity investors, taking into account both capital contributions and distributions since the date of the investors’ original investment. In addition, the purchase price for the Equity Interest was increased at the rate of seven percent (7%) per year, pro-rated on a per diem basis, from January 1, 2007, through the date of the closing of the purchase of the Equity Interest. The option expired on December 31, 2009, subject to earlier termination if not exercised prior to Mr. Patterson’s termination of employment under his employment agreement. The option was not exercised prior to its expiration. The closing on the purchase of the Equity Interest was only to be effective on the earlier of (i) immediately preceding a “change of control” as defined in Mr. Patterson’s employment agreement and (ii) December 31, 2009. The closing would still have occurred and the exercise of the option would be effective if Mr. Patterson’s employment was terminated in connection with or in anticipation of a “change of control” or otherwise after the exercise of the option but prior to the closing on the purchase of the Equity Interest.

In addition, as of June 12, 2008, we instituted a retention and severance program for corporate employees, including Mr. Patterson (our “CEO”), Mr. Hoffman (our “General Counsel”), Mr. Del Vecchio (our “EVP”), Mr. Baron (our “Leasing EVP”) and Ms. Pallardy (our “SVP”). The program provides for the payment of certain retention bonuses in the event of a “change of control” of the Company. A “change of control” is defined as a sale of more than 50% of the voting shares of the Company, a merger or other business combination of the Company (other than a transaction where voting control does not change), a change in any 12 month period of a majority of our Board of Trustees (unless elected by a majority of incumbent directors unless such election was the result of an election contest of the type contemplated by Regulation 14a-11), a sale or disposition of a substantial portion of the Company’s assets, or a transaction pursuant to which the Company is no longer subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.

With respect to our CEO and General Counsel, the program provides for a payment to such executive only if he remains employed seven days after the effective date of the change of control, in which case he would each receive a payment equal to (i) the remaining base compensation he would be entitled to under his existing employment agreement with the Company for the remainder of its term, (ii) a pro-rata annual bonus through to the date of the change of control for the year in which the change of control occurs based on his most recent annual bonus (and a bonus for the prior calendar year if the change of control happens early in a calendar year prior to the payment of annual bonuses), and (iii) a discretionary bonus of at least $300,000 for our CEO and $100,000 for our General Counsel. This program is a retention program and does not amend or modify our CEO’s and General Counsel’s existing employment agreements.

With respect to our EVP, the program provides that the retention payment to him would be paid if he is employed at the time of the change of control, or if he is terminated within six months prior to the change of control in anticipation of the change of control. The payment due to our EVP under the program equals: (i) twelve months of his then current base salary, (ii) an amount equal to the annual bonus paid to him with respect to the 2007 calendar year, (iii) a pro-rata annual bonus as set forth in clause (ii) of the preceding paragraph, and (iv) a discretionary bonus of at least $100,000.

With respect to our Leasing EVP and SVP, the payment triggers are the same as for our EVP and the amount that would be due is equal to six months of his or her then current base salary.

In addition, for the Company’s corporate employees who receive an annual bonus, annual bonuses for the calendar year 2008 paid in February 2009 were approximately one-half of the amount for 2007 bonuses. The retention program referred to above was modified to provide that the remaining one-half would be paid if and when any payment became due under the retention program.

None of our other Named Executive Officers are entitled to termination benefits upon termination of their employment that are not generally available to our other employees.

Option Grants, Exercises and Holdings

Other than as described above, we did not grant any options to purchase our common shares to the Named Executive Officers during 2009 and the Named Executive Officers did not hold any options to purchase our common shares. There were no exercises of options or vesting of stock during 2009. See “ — Employment Agreements” for more information regarding Mr. Patterson’s option. As part of the terms of her employment agreement, Ms. Nancy J. Fendley, our prior Executive Vice President - Leasing, was granted an option to purchase a membership interest in Prime Office equivalent to a 1.0% ownership interest in the Operating Partnership and us. In May 2007, we terminated Ms. Fendley’s employment and her option. Ms. Fendley has disputed such termination and initiated a lawsuit relating to the termination of her option, which the Company believes to be without merit.

Compensation of Trustees

The following table sets forth the compensation earned for the year ended December 31, 2009 with respect to our trustees other than Mr. Patterson (who is also a Named Executive Officer) and whose compensation as a trustee is fully reflected in the Summary Compensation Table and other portions of this Form 10-K. In addition to trustees’ fees, our trustees receive reimbursement of all travel and lodging expenses related to their attendance at both Board and committee meetings. As of December 31, 2009, our trustees did not hold any options to purchase our common shares or hold any of our common shares.

		Fees
		Earned or
		Paid in
		Cash ($)
Name		(1)
David Lichtenstein		$	—
John M. Sabin			55,500
Peyton Owen, Jr.			31,000
Shawn R. Tominus			45,500
Bruno de Vinck			31,000
George R. Whittemore			50,500

Compensation Committee Interlocks and Insider Participation

Our Chairman and the Executive Committee of our Board are charged with determining compensation for our President and Chief Executive Officer. Mr. Patterson is a member of our Board and our President and Chief Executive Officer. No executive officer of ours served as a (i) member of the compensation committee of another entity in which one of the executive officers of such entity served on our Board or (ii) director of another entity in which one of the executive officers of such entity served on our Board, during the year ended December 31, 2009.

Compensation Report

Members of the Board have reviewed and discussed with management the Company’s Compensation Discussion and Analysis presented in this annual report on Form 10-K. Members of management with whom members of the Board discussed the Compensation Discussion and Analysis include the President and Chief Executive Officer, the Senior Executive Vice President, General Counsel and Secretary, the Executive Vice President-Capital Markets and the Vice President-Corporate Accounting.

Based on its review and discussions noted above, the Board determined that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.

BOARD OF TRUSTEES

David Lichtenstein
Peyton Owen, Jr.
Jeffrey A. Patterson
John M. Sabin
Shawn R. Tominus
Bruno de Vinck
George R. Whittemore

Our Compensation Policies and Practices as they relate to Our Risk Management

The Company does not believe that its compensation policies and practices for employees generally are reasonably likely to create a material adverse affect relating to risk-taking by its employees. Although the Company’s Series B preferred shares are publicly traded, the Company’s common shares are not publicly traded and its employees’ compensation is not tied to market fluctuations in the price of the preferred or common shares. In addition, the Company does not have outstanding any stock option, restricted or unrestricted stock or other similar awards which may encourage employees to focus excessively on short-term fluctuations in the market price of the Company’s shares. In addition, although no bonuses were paid for calendar year 2009, historically, bonuses and pay raises at the Company have not been based on short-term or other factors which the Company believes may cause an employee to take excessive risks in order to maximize his or her bonus or pay raise for a calendar year or other period of time. There are several employees involved in leasing activities at the Company who receive leasing bonuses based on the signing of leases with third-party tenants, but the terms of these leases are subject to the prior review and approval of the Trust’s Investment Committee, which consists entirely of employees who do not receive leasing compensation based on the approval of such leases.

Principal Security Holders Of The Company

As more fully described in “Item 1—Business—Background and General”, on July 1, 2005, in connection with the Acquisition, all of our common shares outstanding prior to the transaction were acquired by Prime Office whose principal business address is 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701 and all options to acquire our common shares were cancelled. Prime Office is owned indirectly by David Lichtenstein, the Chairman of our Board.

The following table furnishes information, as of March 20, 2010, as to common units of our Operating Partnership, in each case which are beneficially owned by each trustee, each Named Executive Officer and trustees and executive officers as a group. Unless otherwise indicated in the footnotes to the tables, all of such interests are owned directly, and the indicated person or entity has sole voting and investment power.

		Number of Common Units of
		Prime Group
Name and Address of		Realty L.P. Beneficially				Percent of All Common Units
Beneficial Owner		Owned(1)				of Prime Group Realty, L.P.
David Lichtenstein (2)			26,724,872				100	%
Jeffrey A. Patterson			—				—
James F. Hoffman			—				—
Steven R. Baron			—				—
Paul G. Del Vecchio			—				—
Anita T. Pallardy			—				—
Peyton Owen, Jr.			—				—
John M. Sabin			—				—
Shawn R. Tominus			—				—
Bruno de Vinck			—				—
George R. Whittemore			—				—
Our trustees and executive officers as a group ([11] persons)			26,724,872				100

Equity Compensation Plan Information

As of December 31, 2009, we do not have any equity securities that may be issued upon the exercise of options, warrants and rights under a share incentive plan because our share incentive plan was terminated as a part of the Acquisition on July 1, 2005. The Company has no other compensation plans pursuant to which equity securities may be issued.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Related Persons

BHAC Capital IV, L.L.C. On September 18, 2009, with a transaction effective date of July 16, 2009, PGRT ESH assigned its membership interest in BHAC to LSG-ESH LLC (“LSG-ESH”), an affiliate of the Company’s Chairman of the Board and our parent company, Prime Office. In connection with the transaction, PGRT ESH was released from liability for the obligations under the Citicorp Loan. Due to the related party nature of the transfer of the BHAC interest, including the assumption of the obligations under the Citicorp Loan, this transaction was approved unanimously by our independent trustees and we recorded this transaction as an increase to additional paid-in capital and a reduction of mortgage and notes payable of $80.0 million and a reduction in accrued financing fees included in accounts payable and accrued expenses of $2.1 million. During 2009, the affiliates of Prime Office paid $6.1 million on the Citicorp Loan.

Review, Approval or Ratification of Transaction with Related Persons

It is our policy that any material related party transactions involving us and any of our Board members or shareholder be approved by a majority of the disinterested independent members of the Board after their review and consideration of the fairness of the transaction. The material terms of transactions with related persons referred to above are reviewed and discussed by senior management with the Board and approved by the relevant disinterested independent members of the Board. The foregoing related party transactions were approved consistent with the requirements of this policy.

Director Independence

Since July 1, 2005 our board has included, and our audit committee has consisted of, Messrs. Sabin, Tominus and Whittemore, each of whom is “independent” within the meaning of the NYSE listing standards. Further, since July 1, 2005 and as a result of the Acquisition, only our Series B Shares are listed on a national securities exchange and therefore, pursuant to Section 303A Corporate Governance Rules of the NYSE, we are not required to maintain a compensation committee or a nominating committee with independent members. Since July 1, 2005, the functions of the nominating committee have been performed by our Board as a whole and the compensation committee have been performed by the Executive Committee of our Board.