UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

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

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)

MARYLAND		37-1470730
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7600 Wisconsin Avenue, 11^th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)

(301) 986-9200

(Registrant’s telephone number, including area code)

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

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

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 definitions of “large accelerated filer,” “accelerated filter,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

As of November 4, 2011, there were 50,291,606 common shares, par value $0.001 per share, outstanding.

 

 

FIRST POTOMAC REALTY TRUST

FORM 10-Q

INDEX

		Page
Part I: Financial Information
Item 1. Condensed Consolidated Financial Statements
Consolidated balance sheets as of September 30, 2011 (unaudited) and December 31, 2010			3
Consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2011 and 2010			4
Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2011 and 2010			5
Notes to condensed consolidated financial statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			55
Item 4. Controls and Procedures			56
Part II: Other Information
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Submission of Matters to a Vote of Security Holders			57
Item 5. Other Information			57
Item 6. Exhibits			57
Signatures			59
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

		September 30, 2011				December 31, 2010
		(unaudited)
Assets:
Rental property, net		$	1,427,788			$	1,217,897
Cash and cash equivalents			14,646				33,280
Escrows and reserves			16,730				8,070
Accounts and other receivables, net of allowance for doubtful accounts of $3,138 and $3,246, respectively			7,935				7,238
Accrued straight-line rents, net of allowance for doubtful accounts of $360 and $849, respectively			16,337				12,771
Notes receivable, net			54,644				24,750
Investment in affiliates			24,338				23,721
Deferred costs, net			33,447				20,174
Prepaid expenses and other assets			18,331				14,230
Intangible assets, net			59,587				34,551
Total assets		$	1,673,783			$	1,396,682
Liabilities:
Mortgage loans		$	420,089			$	319,096
Exchangeable senior notes, net			30,357				29,936
Senior notes			75,000				75,000
Secured term loans			30,000				110,000
Unsecured term loan			175,000				—
Unsecured revolving credit facility			142,000				191,000
Accounts payable and other liabilities			50,902				16,827
Accrued interest			4,157				2,170
Rents received in advance			7,129				7,049
Tenant security deposits			5,574				5,390
Deferred market rent, net			5,049				6,032
Total liabilities			945,257				762,500
Noncontrolling interests in the Operating Partnership (redemption value of $36,419 and $16,122, respectively)			39,360				16,122
Equity:
Series A Preferred Shares, $25 par value, 50,000 shares authorized: 4,600 and 0 shares issued and outstanding, respectively			115,000				—
Common shares, $0.001 par value, 150,000 common shares authorized: 50,061 and 49,922 shares issued and outstanding, respectively			50				50
Additional paid-in capital			795,480				794,051
Noncontrolling interests in consolidated partnerships			5,237				3,077
Accumulated other comprehensive loss			(5,405	)			(545	)
Dividends in excess of accumulated earnings			(221,196	)			(178,573	)
Total equity			689,166				618,060
Total liabilities, noncontrolling interests and equity		$	1,673,783			$	1,396,682

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Revenues:
Rental		$	36,121			$	27,520			$	103,025			$	80,665
Tenant reimbursements and other			8,993				6,179				24,776				19,791
Total revenues			45,114				33,699				127,801				100,456
Operating expenses:
Property operating			11,211				7,672				31,476				24,272
Real estate taxes and insurance			4,253				2,948				12,284				9,339
General and administrative			4,354				3,475				12,546				10,859
Acquisition costs			1,737				361				4,475				2,025
Depreciation and amortization			16,088				10,608				45,381				30,487
Impairment of real estate asset			3,111				—				3,111				—
Change in contingent consideration related to acquisition of property			(1,487	)			—				(1,487	)			710
Total operating expenses			39,267				25,064				107,786				77,692
Operating income			5,847				8,635				20,015				22,764
Other expenses, net:
Interest expense			11,207				8,431				30,307				25,333
Interest and other income			(1,534	)			(89	)			(3,769	)			(285	)
Equity in losses of affiliates			81				75				112				134
Gain on early retirement of debt			—				—				—				(164	)
Total other expenses, net			9,754				8,417				26,650				25,018
(Loss) income from continuing operations before income taxes			(3,907	)			218				(6,635	)			(2,254	)
Benefit from income taxes			195				—				655				—
(Loss) income from continuing operations			(3,712	)			218				(5,980	)			(2,254	)
Discontinued operations:
Loss from operations of disposed properties			—				(3,153	)			(2,827	)			(3,412	)
Gain on sale of real estate properties			—				—				1,954				557
Loss from discontinued operations			—				(3,153	)			(873	)			(2,855	)
Net loss			(3,712	)			(2,935	)			(6,853	)			(5,109	)
Less: Net loss attributable to noncontrolling interests			265				55				469				103
Net loss attributable to First Potomac Realty Trust			(3,447	)			(2,880	)			(6,384	)			(5,006	)
Less: Dividends on preferred shares			(2,228	)			—				(6,239	)			—
Net loss attributable to common shareholders		$	(5,675	)		$	(2,880	)		$	(12,623	)		$	(5,006	)
Basic and diluted earnings per share:
(Loss) income from continuing operations		$	(0.12	)		$	—			$	(0.25	)		$	(0.08	)
Loss from discontinued operations			—				(0.08	)			(0.02	)			(0.08	)
Net loss		$	(0.12	)		$	(0.08	)		$	(0.27	)		$	(0.16	)
Weighted average common shares outstanding:
Basic and diluted			49,308				37,269				49,275				34,804

See accompanying notes to condensed consolidated financial statements

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

		Nine Months Ended September 30,
		2011				2010
Cash flows from operating activities:
Net loss		$	(6,853	)		$	(5,109	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Discontinued operations:
Gain on sale of real estate properties			(1,954	)			(557	)
Depreciation and amortization			520				231
Impairment of real estate assets			2,710				4,013
Depreciation and amortization			45,949				31,978
Stock based compensation			2,012				2,869
Bad debt expense			667				767
Benefit from income taxes			(656	)			—
Amortization of deferred market rent			(505	)			(1,044	)
Amortization of financing costs and discounts			1,891				539
Amortization of rent abatement			2,042				1,806
Equity in losses of affiliates			112				134
Distributions from investments in affiliates			84				437
Contingent consideration related to acquisition of property			(1,487	)			710
Gain on early retirement of debt			—				(164	)
Impairment of real estate assets			3,111				—
Changes in assets and liabilities:
Escrows and reserves			(6,411	)			(955	)
Accounts and other receivables			(167	)			(1,349	)
Accrued straight-line rents			(5,771	)			(1,220	)
Prepaid expenses and other assets			(1,683	)			(497	)
Tenant security deposits			183				(155	)
Accounts payable and accrued expenses			5,773				1,160
Accrued interest			1,986				1,716
Rents received in advance			89				(174	)
Deferred costs			(14,841	)			(5,500	)
Total adjustments			33,654				34,745
Net cash provided by operating activities			26,801				29,636
Cash flows from investing activities:
Purchase deposit on future acquisitions			(8,168	)			(3,018	)
Purchase of mortgage loan			—				(7,970	)
Proceeds from sales of real estate assets			26,883				11,414
Change in escrow and reserves			(2,020	)			—
Investment in note receivable			(29,350	)			—
Acquisition of rental property and associated intangible assets			(67,583	)			(81,492	)
Additions to rental property			(26,540	)			(12,017	)
Acquisition of land parcel			(7,500	)			—
Additions to construction in progress			(11,938	)			(2,484	)
Investment in unconsolidated joint ventures			(650	)			—
Deconsolidation of joint venture			—				(896	)
Net cash used in investing activities			(126,866	)			(96,463	)
Cash flows from financing activities:
Financing costs			(4,063	)			(1,327	)
Issuance of debt			348,000				90,000
Issuance of common shares, net			—				94,258
Issuance of preferred shares, net			110,997				—
Contributions from joint venture partners			2,152				—
Repayments of debt			(339,471	)			(94,782	)
Dividends to common shareholders			(30,000	)			(21,115	)
Dividends to preferred shareholders			(5,125	)			—
Distributions to noncontrolling interests			(1,142	)			(439	)
Stock option exercises			83				22
Net cash provided by financing activities			81,431				66,617
Net decrease in cash and cash equivalents			(18,634	)			(210	)
Cash and cash equivalents, beginning of period			33,280				9,320
Cash and cash equivalents, end of period		$	14,646			$	9,110

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows — Continued
(unaudited)

Supplemental disclosures of cash flow information for the nine months ended September 30 are as follows (amounts in thousands):

		2011				2010
Cash paid for interest, net		$	26,292			$	23,059
Cash paid for income based franchise taxes			242				—
Non-cash investing and financing activities:
Debt assumed in connection with acquisitions of real estate			139,373				—
Contingent consideration recorded in connection with acquisition of real estate			745				—
Conversion of Operating Partnership units into common shares			19				55
Issuance of Operating Partnership units in connection with acquisitions of real estate			28,845				—

Cash paid for interest on indebtedness is net of capitalized interest of $1.3 million and $0.6 million for the nine months ended September 30, 2011 and 2010, respectively.

During the nine months ended September 30, 2011, 1,300 Operating Partnership units were redeemed for an equivalent number of the Company’s common shares. No Operating Partnership units were redeemed for an equivalent number of the Company’s common shares during the nine months ended September 30, 2010.

During the nine months ended September 30, 2011 the Company acquired six consolidated properties at an aggregate purchase price of $251.5 million, including the assumption of mortgage debt with an aggregate fair value of $139.4 million. During the nine months ended September 30, 2011, the Company issued 1,963,388 Operating Partnership units valued at $28.8 million in connection with the acquisition of 840 First Street, NE, which was acquired for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property. As a result, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease through August 2023 on the entire building with the exception of two floors. As a result, the Company issued 544,673 Operating Partnership units to satisfy a portion of its contingent consideration obligation. The Company recognized a $1.5 million gain associated with the issuance of the additional units, which represented the difference between the contractual value of the units and the fair value of the units at the date of issuance. At September 30, 2011, the remaining contingent consideration obligation was $0.7 million, which may result in the issuance of additional units dependent upon the leasing of any of the vacant space.

FIRST POTOMAC REALTY TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct segments, which it refers to as the Maryland, Washington, D.C., Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

References in these unaudited condensed consolidated financial statements to “we,” “our” or “First Potomac,” refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of September 30, 2011, owned a 94.5% interest in, the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

At September 30, 2011, the Company wholly-owned or had a controlling interest in properties totaling 13.9 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.5 million square feet through four unconsolidated joint ventures. The Company also owned land that can accommodate approximately 2.4 million square feet of additional development. The Company derives substantially all of its revenue from leases of space within its properties. As of September 30, 2011, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for over 20% of the Company’s total annualized rental revenue. The U.S Government also accounted for approximately 30% of the Company’s outstanding accounts receivables at September 30, 2011. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, the subsidiaries of the Operating Partnership in which it has a controlling interest and First Potomac Management LLC, a wholly-owned subsidiary that manages the majority of the Company’s properties. All intercompany balances and transactions have been eliminated in consolidation.

The Company has condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the accompanying unaudited condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010, included in the Company’s current report on Form 8-K dated September 29, 2011 and as updated from time to time in other filings with the Securities and Exchange Commission.

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly the Company’s financial position as of September 30, 2011, the results of its operations for the three and nine months ended September 30, 2011 and 2010 and its cash flows for the nine months ended September 30, 2011 and 2010. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year.

(b) Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible; recoverability of notes receivable, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill; derivative valuations; market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.

(c) Rental Property

Rental property is carried at initial cost less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:

Buildings		39 years
Building improvements		5 to 20 years
Furniture, fixtures and equipment		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases
Lease related intangible assets		Shorter of the term of related lease or the period the tenant occupies the space

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the fair value of a property, an impairment analysis is performed. The Company assesses potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make estimates as to whether there are impairments in the carrying values of its investments in real estate. Further, the Company will record an impairment loss if it expects to dispose of a property, in the near term, at a price below carrying value. In such an event, the Company will record an impairment loss based on the difference between a property’s carrying value and its projected sales price less any estimated costs to sell.

The Company will classify a building as held-for-sale in the period in which it has made the decision to dispose of the building, the Company’s Board of Trustees or a designated delegate has approved the sale, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its consolidated statements of operations for all periods presented and classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in the period the sale criteria are met. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by the Company after the disposition.

The Company recognizes the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.

The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. The Company will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress and the direct compensation costs of the Company’s construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. For the three and nine months ended September 30, 2011 and 2010, capitalized compensation costs were immaterial. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(d) Notes Receivable

The Company lends money to the owners of real estate properties, which are collateralized by a direct or indirect interest in the real estate property. The Company records these investments as “Notes receivable, net” in its consolidated balance sheets. The investments are recorded net of any discount or issuance costs, which are amortized over the life of the respective note receivable using the effective interest method. The Company records interest earned from notes receivable and amortization of any discount or issuance costs within “Interest and other income” in its consolidated statements of operations.

The Company will establish a provision for anticipated credit losses associated with its notes receivables and debt investments when it anticipates that it may be unable to collect any contractually due amounts. This determination is based on upon such factors as delinquencies, loss experience, collateral quality and current economic or borrower conditions. Estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that the Company estimates to be adequate based on these factors. The Company has not recorded any losses associated with its notes receivable during 2011 and 2010.

(e) Reclassifications

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

(f) Application of New Accounting Standards

New guidance was issued that allows only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the consolidated financial statements. The guidance requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company believes the adoption of this update will change the order in which certain consolidated financial statements are presented and provide additional detail on those consolidated financial statements when applicable, but will not have any other impact on its consolidated financial statements.

In September 2011, new accounting guidance was issued regarding the testing of potential goodwill impairment, which permits a company to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If a company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. Goodwill must be tested for impairment at least annually, and prior to the new guidance, a two-step test was required to assess goodwill for impairment. The required disclosure is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not believe the implementation of this standard will have a material impact on its condensed consolidated financial statements.

(3) Earnings Per Share

Basic earnings or loss per share (“EPS”) is calculated by dividing net income or loss attributable to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the period, which include stock options, non-vested shares, preferred shares and Exchangeable Senior Notes. The Company applies the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in total earnings attributable to common shareholders in the Company’s computation of EPS.

The following table sets forth the computation of the Company’s basic and diluted earnings per share (amounts in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Numerator for basic and diluted earnings per share:
(Loss) income from continuing operations		$	(3,712	)		$	218			$	(5,980	)		$	(2,254	)
Loss from discontinued operations			—				(3,153	)			(873	)			(2,855	)
Net loss			(3,712	)			(2,935	)			(6,853	)			(5,109	)
Less: Net loss (income) from continuing operations attributable to noncontrolling interests			265				(4	)			487				48
Less: Net loss (income) from discontinued operations attributable to noncontrolling interests			—				59				(18	)			55
Net loss attributable to First Potomac Realty Trust			(3,447	)			(2,880	)			(6,384	)			(5,006	)
Less: Dividends on preferred shares			(2,228	)			—				(6,239	)			—
Net loss attributable to common shareholders			(5,675	)			(2,880	)			(12,623	)			(5,006	)
Less: Allocation to participating securities			(150	)			(151	)			(442	)			(455	)
Net loss attributable to common shareholders		$	(5,825	)		$	(3,031	)		$	(13,065	)		$	(5,461	)
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding — basic and diluted			49,308				37,269				49,275				34,804
Basic and diluted earnings per share:
(Loss) income from continuing operations		$	(0.12	)		$	—			$	(0.25	)		$	(0.08	)
Loss from discontinued operations			—				(0.08	)			(0.02	)			(0.08	)
Net loss		$	(0.12	)		$	(0.08	)		$	(0.27	)		$	(0.16	)

In accordance with accounting requirements regarding earnings per share, the Company did not include the following potential common shares in its calculation of diluted earnings per share as they are anti-dilutive (amounts in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Stock option awards			903				832				907				843
Non-vested share awards			388				310				406				327
Conversion of Exchangeable Senior Notes(1)			854				854				854				1,180
Series A Preferred Shares(2)			8,303				—				7,636				—
			10,448				1,996				9,803				2,350

(1)		At September 30, 2011 and 2010, each $1,000 principal amount of the Exchangeable Senior Notes was convertible into 28.039 shares.
(2)		The Company’s Series A Preferred Shares are only convertible into the Company’s common shares upon certain changes of control of the Company.

(4) Rental Property

Rental property represents property, net of accumulated depreciation, and developable land that are wholly owned or owned by an entity in which the Company has a controlling interest. All of the Company’s rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (amounts in thousands):

		September 30, 2011				December 31, 2010
Land and land improvements		$	385,306			$	315,229
Buildings and improvements			1,045,358				930,077
Construction in process			63,331				41,685
Tenant improvements			108,361				92,002
Furniture, fixtures and equipment			5,381				9,894
			1,607,737				1,388,887
Less: accumulated depreciation			(179,949	)			(170,990	)
		$	1,427,788			$	1,217,897

(a) Development and Redevelopment Activity

The Company constructs office buildings, business parks and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 2.4 million square feet of additional building space. Below is a summary of the approximate building square footage that can be developed on the Company’s developable land and the Company’s current development and redevelopment activity (amounts in thousands):

						Square Feet				Cost to Date of				Square Feet				Cost to Date of
Reporting		Developable				Under				Development				Under				Redevelopment
Segment		Square Feet				Development				Activities				Redevelopment				Activities
Maryland			250				—			$	—				—			$	—
Northern Virginia			568				—				—				15				—
Southern Virginia			841				166				477				—				—
Washington, D.C.			742				—				—				135				1,225
			2,401				166			$	477				150			$	1,225

The Company anticipates the majority of the development and redevelopment efforts on these projects will continue throughout the remainder of 2011 and into 2012.

At September 30, 2011, the Company had completed development and redevelopment activities that have yet to be placed in service on 243 thousand square feet, at a cost of $16.1 million, in its Northern Virginia reporting segment and 39 thousand square feet, at a cost of $1.2 million, in its Southern Virginia reporting segment. The majority of the costs on the construction projects to be placed in service relate to redevelopment activities at Three Flint Hill in the Company’s Northern Virginia reporting segment, which were completed in the third quarter of 2011 at a cost of $11.0 million. The Company will place completed construction activities in service upon the shorter of a tenant taking occupancy or twelve months from substantial completion.

(b) Acquisitions

During the third quarter of 2011, the Company acquired the following properties, which are included in its condensed consolidated financial statements from the date of acquisition (dollars in thousands):

Aggregate

Acquisition

Property

Square

Purchase

Location

Date

Type

Feet

Price

Greenbrier Towers

Southern Virginia

July 19

Office

171,894

$

16,641

1005 First Street, NE

Washington, D.C.

August 4

Office

30,414

45,240

(1)

202,308

$

61,881

(1)		Includes a deferred purchase price liability of $8.6 million.

On August 4, 2011, the Company formed a joint venture with an affiliate of Perseus Realty, LLC to acquire 1005 First Street, NE in Washington, D.C. for $46.8 million, of which, $38.4 million was paid at closing and the remaining $8.4 million will be paid in August 2013. The Company recorded the $8.4 million deferred purchase price obligation at its fair value at the time of acquisition within “Accounts payable and other liabilities” in its consolidated balance sheets. The Company determined the fair value of the deferred purchase price by calculating the present value of the obligation that is due in 2013 using a discount rate for comparable transactions. The site is currently occupied by the Greyhound Lines, Inc., “Greyhound”, which leased back the site under a ten-year lease agreement with a termination option, at no penalty, after the second year. Greyhound has announced that it intends to relocate its operations to nearby Union Station, at which point the joint venture anticipates developing the 1.6 acre site, which can accommodate development of up to approximately 712,000 square feet of office space. The development of the site will be managed by an affiliate of Perseus Realty, LLC. The property is located in a former industrial area of Washington, D.C. where contaminated soil and/or groundwater are commonly encountered due to past usage. The Company solicited a third party to quantify the remediation needed at the property to remove any contaminates. The third party determined the approximate cost of the site remediation to be $2.4 million, which the Company recorded as an addition to “Accounts payable and other liabilities” on its consolidated balance sheets. The Company anticipates owning 97% of the joint venture when the joint venture is fully capitalized. At acquisition, the fair value of the noncontrolling interest in the Greyhound property was approximately $1.2 million, which equates to the Company’s joint venture partner’s proportionate share of the purchase price.

The fair values of the assets and liabilities acquired in the third quarter of 2011 are as follows (amounts in thousands):

Land		$	46,497
Acquired tenant improvements			1,325
Building and improvements			13,264
In-place leases			2,249
Acquired leasing commissions			351
Marketing and legal intangible			188
Above-market leases acquired			448
Total assets acquired			64,322
Below-market leases assumed			(91	)
Environmental remediation obligation			(2,350	)
Deferred purchase price obligation			(6,840	)
Net assets acquired		$	55,041

The fair values for the assets and liabilities acquired in 2011 are preliminary as the Company continues to finalize their acquisition date fair value determination.

At September 30, 2011, the weighted average amortization period of the Company’s consolidated intangible assets acquired in the third quarter of 2011 was 3.3 years. At September 30, 2011, the intangible assets acquired during the third quarter are comprised of the following categories with their respective weighted average amortization periods: acquired tenant improvements 3.6 years; in-place leases 3.1 years; acquired leasing commissions 3.6 years; marketing and legal expenses 3.4 years; above market leases 3.4 years; and below-market leases 4.4 years.

In March 2011, the Company acquired 840 First Street, NE, and, upon completion of the final tax return by the prior ownership entity during the third quarter, the Company recognized a deferred tax liability associated with the carryover basis of the property. As a result, the Company recognized goodwill of approximately $4.8 million on its consolidated balance sheet representing the residual difference between the consideration transferred and the acquisition date fair value of the identifiable assets acquired and liabilities assumed, including deferred taxes representing the difference between the fair value at acquisition and the carryover basis used for income tax purposes.

(5) Notes Receivable

Below is a summary of the Company’s notes receivable as of September 30, 2011 (dollars in thousands):

						Balance At September 30, 2011
						Unamortized
						Origination								Interest
Issued		Face Amount				Costs				Balance				Rate				Secured Property
December 2010		$	25,000			$	(220	)		$	24,780				12.5	%		950 F Street, NW
April 2011			30,000				(136	)			29,864				9.0	%		America’s Square
		$	55,000			$	(356	)		$	54,644

During the three and nine months ended September 30, 2011, the Company recorded interest income of $1.5 million and $3.6 million, respectively, related to its notes receivable.

(6) Investment in Affiliates

The Company owns an interest in several properties for which it does not control the activities that are most significant to the operations of the properties. As a result, the assets, liabilities and operating results of these noncontrolled properties are not consolidated within the Company’s condensed consolidated financial statements. The Company’s investment in these properties is recorded as “Investment in affiliates” in its consolidated balance sheets.

Since January 1, 2010, the Company has had a 25% noncontrolling interest in the two separate unconsolidated joint ventures that own RiversPark I and II. During the fourth quarter of 2010, the Company entered into two separate joint ventures, in which it had a 50% noncontrolling interest, to own 1750 H Street, NW and Aviation Business Park.

The net assets of the Company’s unconsolidated joint ventures consisted of the following (amounts in thousands):

		September 30, 2011				December 31, 2010
Assets:
Rental property, net		$	103,415			$	104,559
Cash and cash equivalents			2,919				1,706
Other assets			9,838				11,442
Total assets			116,172				117,707
Liabilities:
Mortgage loans(1)			59,111				59,914
Other liabilities			2,287				4,316
Total liabilities			61,398				64,230
Net assets		$	54,774			$	53,477

(1)		Of the total mortgage debt that encumbers the Company’s unconsolidated properties, $7.0 million is recourse to the Company.

The following table summarizes the results of operations of the Company’s unconsolidated joint ventures. The Company’s share of earnings or losses related to its unconsolidated joint ventures is recorded in its consolidated statements of operations as “Equity in losses of affiliates” (amounts in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Total revenues		$	2,896			$	1,158			$	8,860			$	3,459
Total operating expenses			(995	)			(237	)			(2,917	)			(887	)
Net operating income			1,901				921				5,943				2,572
Depreciation and amortization			(1,274	)			(751	)			(3,835	)			(1,705	)
Other expenses, net			(854	)			(471	)			(2,429	)			(1,402	)
Net loss		$	(227	)		$	(301	)		$	(321	)		$	(535	)

(7) Discontinued Operations

The following table is a summary of property dispositions whose operating results are reflected as discontinued operations in the Company’s condensed consolidated statements of operations:

		Reporting		Disposition				Square
		Segment		Date		Property Type		Feet
Aquia Commerce Center I & II		Northern Virginia		6/22/2011		Office			64,488
Gateway West		Maryland		5/27/2011		Office			111,481
Old Courthouse Square		Maryland		2/18/2011		Retail			201,208
7561 Lindbergh Drive		Maryland		6/16/2010		Industrial			36,000
Deer Park		Maryland		4/23/2010		Business Park			171,125
									584,302

The Company has had, and will have, no continuing involvement with any of its disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income taxes. The Company did not dispose of or enter into any binding agreements to sell any other properties during the nine months ended September 30, 2011 and 2010.

The following table summarizes the components of net loss from discontinued operations (amounts in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues		$	—			$	957			$	1,055			$	3,146
Net loss, before gain on sale or taxes			—				(3,153	)			(2,827	)			(3,412	)
Gain on sale of real estate properties			—				—				1,954				557

(8) Debt

The Company’s borrowings consisted of the following (dollars in thousands):

		September 30,				December 31,
		2011				2010
Mortgage loans, effective interest rates ranging from 4.40% to 7.29%, maturing at various dates through June 2021		$	420,089			$	319,096
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing December 2011(1)			30,357				29,936
Series A senior notes, effective interest rate of 6.41%, maturing June 2013			37,500				37,500
Series B senior notes, effective interest rate of 6.55%, maturing June 2016			37,500				37,500
Secured term loan, effective interest rate of LIBOR plus 3.50%, maturing January 2014(2)(3)			30,000				40,000
Secured term loan, effective interest rate of LIBOR plus 2.50%, matured August 2011(3)(4)			—				20,000
Secured term loan, effective interest rate of LIBOR plus 3.50%, matured August 2011(3)(5)			—				50,000
Unsecured term loan, effective interest rates ranging from LIBOR plus 2.15% to LIBOR plus 2.30%, with staggered maturity dates ranging from July 2016 to July 2018(3)(5)			175,000				—
Unsecured revolving credit facility, effective interest rate of LIBOR plus 2.50%, maturing January 2015(3)(5)(6)			142,000				191,000
		$	872,446			$	725,032

(1)		The principal balance of the Exchangeable Senior Notes was $30.4 million at September 30, 2011 and December 31, 2010.
(2)		On January 1, 2011, the loan’s applicable interest rate increased to LIBOR plus 3.50% and will continue to increase by 100 basis points every year, to a maximum of 550 basis points.
(3)		At September 30, 2011, LIBOR was 0.24%.
(4)		On August 11, 2011, the Company repaid its $20.0 million secured term loan with borrowings under its unsecured revolving credit facility.
(5)		On July 18, 2011, the Company repaid its $50.0 million secured term loan and paid down $117.0 million of the outstanding balance on its unsecured revolving credit facility with proceeds from the issuance of a three-tranche $175.0 million unsecured term loan.
(6)		The unsecured revolving credit facility matures in January 2014 with a one-year extension at the Company’s option, which it intends to exercise.

(a) Mortgage Loans

The following table provides a summary of the Company’s mortgage debt at September 30, 2011 and December 31, 2010 (dollars in thousands):

						Effective
		Contractual				Interest				Maturity				September 30,				December 31,
Encumbered Property		Interest Rate				Rate				Date				2011				2010
Indian Creek Court (1)			7.80	%			5.90	%		January 2011				$	—			$	11,982
403/405 Glenn Drive (2)			7.60	%			5.50	%		July 2011					—				7,960
4612 Navistar Drive (2)			7.48	%			5.20	%		July 2011					—				12,189
Campus at Metro Park (3)			7.11	%			5.25	%		February 2012					21,917				22,556
One Fair Oaks			6.31	%			6.72	%		June 2012					52,706				—
1434 Crossways Blvd Building II			7.05	%			5.38	%		August 2012					9,196				9,484
Crossways Commerce Center			6.70	%			6.70	%		October 2012					23,839				24,179
Newington Business Park Center			6.70	%			6.70	%		October 2012					15,037				15,252
Prosperity Business Center			6.25	%			5.75	%		January 2013					3,414				3,502
Aquia Commerce Center I(4)			7.28	%			7.28	%		February 2013					—				353
Cedar Hill			6.00	%			6.58	%		February 2013					15,944				—
Merrill Lynch Building			6.00	%			7.29	%		February 2013					13,639				—
1434 Crossways Blvd Building I			6.25	%			5.38	%		March 2013					8,014				8,225
Linden Business Center			6.01	%			5.58	%		October 2013					6,959				7,080
840 First Street, NE			5.18	%			6.05	%		October 2013					55,999				—
Owings Mills Business Center			5.85	%			5.75	%		March 2014					5,367				5,448
Annapolis Commerce Park East			5.74	%			6.25	%		June 2014					8,394				8,491
Cloverleaf Center			6.75	%			6.75	%		October 2014					16,984				17,204
Plaza 500, Van Buren Business Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center, Northridge I & II and 15395 John Marshall Highway			5.19	%			5.19	%		August 2015					98,056				99,151

						Effective
		Contractual				Interest				Maturity				September 30,				December 31,
Encumbered Property		Interest Rate				Rate				Date				2011				2010
Hanover Business Center:
Building D			8.88	%			6.63	%		August 2015					551				642
Building C			7.88	%			6.63	%		December 2017					951				1,041
Chesterfield Business Center:
Buildings C,D,G and H			8.50	%			6.63	%		August 2015					1,449				1,681
Buildings A,B,E and F			7.45	%			6.63	%		June 2021					2,277				2,398
7458 Candlewood Road — Note 1			4.67	%			6.04	%		January 2016					4,722				4,761
7458 Candlewood Road — Note 2			6.57	%			6.30	%		January 2016					9,779				9,938
Gateway Centre, Building I			7.35	%			5.88	%		November 2016					1,060				1,189
500 First Street, NW			5.72	%			5.79	%		July 2020					38,409				38,793
Battlefield Corporate Center			4.26	%			4.40	%		November 2020					4,184				4,289
Airpark Business Center			7.45	%			6.63	%		June 2021					1,242				1,308
Total Mortgage Debt							5.98	%(5)						$	420,089			$	319,096

(1)		The loan was repaid in January 2011 with available cash.
(2)		The loan was repaid in July 2011 with borrowings under the Company’s unsecured revolving credit facility.
(3)		The maturity date presented for the loan represents the anticipated repayment date of the loan, after which date the interest rate on the loan will increase to a predetermined amount identified in the debt agreement. The effective interest rate was calculated based on the anticipated period the debt is expected to be outstanding.
(4)		The loan was repaid in April 2011 with available cash.
(5)		Weighted average interest rate on total mortgage debt.

(b) Unsecured Term Loan

On July 18, 2011, the Company entered into a three-tranche $175.0 million unsecured term loan. The unsecured term loan’s three tranches have maturity dates staggered in one-year intervals. Tranche A has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 215 basis points and matures on July 18, 2016. Tranche B has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 225 basis points and matures on July 18, 2017. Tranche C has an outstanding balance of $55.0 million at an interest rate of LIBOR plus 230 basis points and matures on July 18, 2018. The term loan agreement contains various restrictive covenants substantially similar to those contained in the Company’s revolving credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the agreement requires that the Company satisfy certain financial covenants that are also substantially similar to those contained in the Company’s revolving credit facility. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the agreement to be immediately due and payable. The Company used the funds to pay down $117.0 million of the outstanding balance on its unsecured revolving credit facility, to repay its $50.0 million senior secured term loan and for other general corporate purposes.

(c) Unsecured Revolving Credit Facility

During the third quarter of 2011, the Company repaid $117.0 million of the outstanding balance of its unsecured revolving credit facility with proceeds from the issuance of a $175.0 million unsecured term loan. During the third quarter of 2011, the Company borrowed $95.0 million on its unsecured revolving credit facility to fund the acquisition of 1005 First Street, NE, to repay the outstanding balance on two mortgage loans, to repay its $20.0 million secured term loan and for general corporate purposes. For the three and nine months ended September 30, 2011, the Company’s weighted average borrowings outstanding on its unsecured revolving credit facility were $133.9 million and $133.3 million, respectively, with a weighted average interest rate of 2.7% and 3.0%, respectively, compared with weighted average borrowings of $125.7 million and $120.5 million with a weighted average interest rate of 3.3% and 3.6% for the three and nine months ended September 30, 2010, respectively. At September 30, 2011, outstanding borrowings under the unsecured revolving credit facility were $142.0 million. The Company is required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility, which was $113.0 million at September 30, 2011.

(d) Interest Rate Swap Agreements

During the third quarter of 2011, the Company entered into five interest rate swap agreements that fixed LIBOR on $150.0 million of its variable rate debt. As of September 30, 2011, the Company has hedged $200.0 million of its variable rate debt through six interest rate swap agreements. See footnote 9, Derivative Instruments and Comprehensive Loss for more information about the Company’s interest rate swap agreements.

(e) Debt Covenants

Certain of the Company’s subsidiaries are borrowers on mortgage loans, the terms of which prohibit certain direct or indirect transfers of ownership interests in the borrower subsidiary (a “Prohibited Transfer”). Under the terms of the mortgage loan documents, a lender could assert that a Prohibited Transfer includes the trading of the Company’s common shares on the NYSE, the issuance of common shares by the Company, or the issuance of units of limited partnership interest in the Operating Partnership. As of September 30, 2011, the Company believes that there were six mortgage loans with such Prohibited Transfer provisions, representing an aggregate principal amount outstanding of approximately $57.2 million, of which two mortgages totaling $38.9 million are scheduled to mature in 2012. Two of these mortgage loans were entered into prior to the Company’s initial public offering (“IPO”) in 2003 and four were assumed subsequent to its IPO. In each instance, the Company received the consent of the mortgage lender to consummate its IPO (for the two pre-IPO loans) or to acquire the property or the ownership interests of the borrower (for the post-IPO loans), including the assumption by its subsidiary of the mortgage loan. Generally, the underlying mortgage documents, previously applicable to a privately held owner, were not changed at the time of the IPO or the later loan assumptions, although the Company believes that each of the lenders or servicers was aware that the borrower’s ultimate parent was or would become a publicly traded company. Subsequent to the IPO and the assumption of these additional mortgage loans, the Company has issued new common shares and shares of the Company have been transferred on the New York Stock Exchange. Similarly, the Operating Partnership has issued units of limited partnership interest. To date, no lender or servicer has asserted that a Prohibited Transfer has occurred as a result of any such transfer of shares or units of limited partnership interest. If a lender were to be successful in any such action, the Company could be required to immediately repay or refinance the amounts outstanding, or the lender may be able to foreclose on the property securing the loan or take other adverse actions. In addition, in certain cases a Prohibited Transfer could result in the loan becoming fully recourse to the Company or its Operating Partnership. In addition, if a violation of a Prohibited Transfer provision were to occur that would permit the Company’s mortgage lenders to accelerate the indebtedness owed to them, it could result in an event of default under the Company’s Series A and Series B Senior Notes, its unsecured revolving credit facility, its unsecured term loan, its secured term loan and its Exchangeable Senior Notes.

At September 30, 2011, the Company was in compliance with all of the financial covenants associated with its debt instruments.

(9) Income Taxes

The Company owns properties located in Washington, D.C. that are subject to local income based franchise taxes. During the three and nine months ended September 30, 2011, the Company recognized a benefit for income taxes of $0.2 million and $0.7 million, respectively, related to franchise taxes levied by the city of Washington, D.C. at an effective rate of 9.975%. The Company acquired its first property in Washington, D.C. that was subject to local franchise taxes in the fourth quarter of 2010 and was not subject to any franchise taxes during the three and nine months ended September 30, 2010.

The Company recognizes deferred tax assets only to the extent that it is more likely than not that deferred tax assets will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. The Company’s deferred tax assets and liabilities are primarily associated with differences in the GAAP and tax basis of its real estate assets arising from acquisition costs, intangible assets and deferred market rent assets and liabilities that are associated with properties located in Washington, D.C. and recorded in its consolidated balance sheets. As of September 30, 2011 and December 31, 2010, the Company recorded its deferred tax assets within “Prepaid expenses and other assets” and recorded its deferred tax liabilities within “Accounts payable and other liabilities” in the Company’s consolidated balance sheets.

The Company has not recorded a valuation allowance against its deferred tax assets as it determined that is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. The Company has not recognized any deferred tax assets or liabilities as a result of uncertain tax positions and has no material net operating loss, capital loss or alternative minimum tax carryovers. There was no (benefit) provision for income taxes associated with the Company’s discontinued operations for any period presented. At September 30, 2011, the Company had deferred tax assets totaling $1.3 million and deferred tax liabilities totaling $5.0 million.

(10) Derivative Instruments and Comprehensive Loss

The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage exposures that arise from business activities in which its future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. No hedging activity can completely insulate the Company from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect the Company or adversely affect it because, among other things:

•

available interest rate hedging may not correspond directly with the interest rate risk for which the Company seeks protection;

•

the duration of the hedge may not match the duration of the related liability;

•

the party owing money in the hedging transaction may default on its obligation to pay; and

•

the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the Company’s ability to sell or assign its side of the hedging transaction.

The Company enters into interest rate swap agreements to hedge its exposure on its variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instrument’s applicable interest rate. During the third quarter of 2011, the Company entered into five interest rate swap agreements that fixed LIBOR on $150.0 million of its variable rate debt. At September 30, 2011, the Company has hedged $200.0 million of its variable rate debt through six interest rate swap agreements.

The table below summarizes the Company’s interest rate swap agreements as of September 30, 2011 (dollars in thousands):

										Interest Rate
										Contractual				Fixed LIBOR
Effective Date		Maturity Date				Amount				Component				Interest Rate
January 2011(1)		January 2014				$	50,000			LIBOR					1.474	%
July 2011		July 2016					35,000			LIBOR					1.754	%
July 2011		July 2016					25,000			LIBOR					1.7625	%
July 2011		July 2017					30,000			LIBOR					2.093	%
July 2011		July 2017					30,000			LIBOR					2.093	%
September 2011		July 2018					30,000			LIBOR					1.660	%
						$	200,000

(1)		The Company entered into this interest rate swap agreement in July 2010.

The Company’s interest rate swap agreements are designated as effective cash flow hedges and the Company records any unrealized gains associated with the change in fair value of the swap agreements within equity and “Prepaid expenses and other assets” and any unrealized losses within equity and “Accounts payable and other liabilities.” The Company records its proportionate share of unrealized gains or losses on its cash flow hedges associated with its unconsolidated joint ventures within equity and “Investment in affiliates.”

In September 2008, the Company entered into an interest rate swap agreement that fixed the $28.0 million variable rate mortgage encumbering RiversPark I and II at 5.97%. The mortgage has a contractual interest rate of LIBOR plus 2.50%. On March 17, 2009 and January 1, 2010, the Company deconsolidated the joint ventures that own RiversPark II and RiversPark I, respectively. As a result, the $28.0 million mortgage loan and related interest rate swap for RiversPark I and II are not consolidated in the Company’s consolidated financial statements. The interest rate swap agreement matured in September 2011.

Total comprehensive loss is summarized as follows (amounts in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Net loss		$	(3,712	)		$	(2,935	)		$	(6,853	)		$	(5,109	)
Unrealized (loss) gain on derivative instruments			(4,817	)			(518	)			(5,100	)			605
Total comprehensive loss			(8,529	)			(3,453	)			(11,953	)			(4,504	)
Comprehensive loss attributable to noncontrolling interests			494				65				716				89
Comprehensive loss attributable to First Potomac Realty Trust		$	(8,035	)		$	(3,388	)		$	(11,237	)		$	(4,415	)

(11) Fair Value Measurements

The Company adopted accounting provisions that outline a valuation framework and create a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The new disclosures increase the consistency and comparability of fair value measurements and the related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability between willing third parties at the measurement date (an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair value, and the Company provides the necessary disclosures that are required for items measured at fair value as outlined in the accounting requirements regarding fair value.

Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.

The three levels are as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3 — Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of the Company’s consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of September 30, 2011 and December 31, 2010 (amounts in thousands):

		Balance at
		September 30, 2011				Level 1				Level 2				Level 3
Non-recurring Measurement:
Impaired real estate asset		$	5,750			$	—			$	—			$	5,750
Recurring Measurements:
Derivative instrument-swap instruments		$	5,660			$	—			$	5,660			$	—
Contingent consideration related to acquisition of:
Ashburn Center			1,398				—				—				1,398
840 First Street, NE			745				—				—				745

		Balance at
		December 31, 2010				Level 1				Level 2				Level 3
Non-recurring Measurement:
Impaired real estate assets		$	10,950			$	—			$	10,950			$	—
Recurring Measurements:
Derivative instrument-swap instrument			396				—				396				—
Contingent consideration related to acquisition of:
Ashburn Center			1,398				—				—				1,398