Exhibit 99.3

 

INDEX TO FINANCIAL STATEMENTS

 

CORPORATE OFFICE PROPERTIES, L.P. CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS

 

Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012	F-2
Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited)	F-3
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)	F-4
Consolidated Statements of Equity for the Three Months Ended March 31, 2013 and 2012 (unaudited)	F-5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)	F-6
Notes to Consolidated Financial Statements	F-8
CORPORATE OFFICE PROPERTIES, L.P. CONSOLIDATED ANNUAL FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm	F-32
Consolidated Balance Sheets as of December 31, 2012 and 2011	F-33
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011, and 2010	F-34
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011, and 2010	F-35
Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011, and 2010	F-36
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011, and 2010	F-37
Notes to Consolidated Financial Statements	F-39
Schedule III—Real Estate and Accumulated Depreciation	F-89

 

F-1

 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Balance Sheets

 

(in thousands, except unit data)

 

(unaudited)

 

		March 31, 2013			December 31, 2012
Assets
Properties, net:
Operating properties, net		$	2,705,335		$	2,597,666
Projects in development or held for future development		484,638			565,378
Total properties, net		3,189,973			3,163,044
Assets held for sale, net		142,404			140,229
Cash and cash equivalents		23,509			10,594
Restricted cash and marketable securities		9,982			14,781
Accounts receivable (net of allowance for doubtful accounts of $5,351 and $4,694, respectively)		10,768			19,247
Deferred rent receivable		88,716			85,802
Intangible assets on real estate acquisitions, net		72,035			75,879
Deferred leasing and financing costs, net		59,856			59,952
Prepaid expenses and other assets		80,798			77,455
Total assets		$	3,678,041		$	3,646,983
Liabilities and equity
Liabilities:
Debt, net		$	1,957,360		$	2,019,168
Accounts payable and accrued expenses		90,645			97,922
Rents received in advance and security deposits		26,024			27,632
Dividends and distributions payable		29,947			28,698
Deferred revenue associated with operating leases		10,833			11,995
Distributions received in excess of investment in unconsolidated real estate joint venture		6,420			6,420
Interest rate derivatives		5,340			6,185
Other liabilities		573			2,166
Total liabilities		2,127,142			2,200,186
Commitments and contingencies (Note 16)
Redeemable noncontrolling interest		10,356			10,298
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units
General partner, 12,821,667 preferred units outstanding at March 31, 2013 and December 31, 2012		333,833			333,833
Limited partner, 352,000 preferred units outstanding at March 31, 2013 and December 31, 2012		8,800			8,800
Common units, 85,758,438 and 80,952,986 held by the general partner and 3,818,898 and 4,067,542 held by limited partners at March 31, 2013 and December 31, 2012, respectively		1,191,776			1,089,391
Accumulated other comprehensive loss		(4,634		)	(5,708		)
Total Corporate Office Properties, L.P.’s equity		1,529,775			1,426,316
Noncontrolling interests in subsidiaries		10,768			10,183
Total equity		1,540,543			1,436,499
Total liabilities, redeemable noncontrolling interest and equity		$	3,678,041		$	3,646,983

 

See accompanying notes to consolidated financial statements.

 

F-2

 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Operations

 

(in thousands, except per unit data)

 

(unaudited)

 

		For the Three Months Ended March 31,
		2013			2012
Revenues
Rental revenue		$	95,295		$	89,859
Tenant recoveries and other real estate operations revenue		21,440			20,802
Construction contract and other service revenues		14,262			21,534
Total revenues		130,997			132,195
Expenses
Property operating expenses		42,575			41,253
Depreciation and amortization associated with real estate operations		28,252			27,834
Construction contract and other service expenses		13,477			20,607
Impairment losses (recoveries)		1,857			(4,836		)
General, administrative and leasing expenses		7,820			9,569
Business development expenses and land carry costs		1,359			1,576
Total operating expenses		95,340			96,003
Operating income		35,657			36,192
Interest expense		(22,307		)	(24,431		)
Interest and other income		946			1,217
Loss on early extinguishment of debt		(5,184		)	—
Income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes		9,112			12,978
Equity in income (loss) of unconsolidated entities		41			(89		)
Income tax expense		(16		)	(204		)
Income from continuing operations		9,137			12,685
Discontinued operations		3,786			(2,450		)
Income before gain on sales of real estate		12,923			10,235
Gain on sales of real estate		2,354			—
Net income		15,277			10,235
Net loss attributable to noncontrolling interests in consolidated entities		336			570
Net income attributable to Corporate Office Properties, L.P.		15,613			10,805
Preferred unit distributions		(6,271		)	(4,190		)
Net income attributable to Corporate Office Properties, L.P. common unitholders		$	9,342		$	6,615
Net income attributable to Corporate Office Properties, L.P.:
Income from continuing operations		$	11,860		$	13,261
Discontinued operations, net		3,753			(2,456		)
Net income attributable to Corporate Office Properties, L.P.		$	15,613		$	10,805
Basic earnings per common unit(1)
Income from continuing operations		$	0.06		$	0.12
Discontinued operations		0.05			(0.03		)
Net income attributable to common unitholders		$	0.11		$	0.09
Diluted earnings per common unit(1)
Income from continuing operations		$	0.06		$	0.12
Discontinued operations		0.05			(0.03		)
Net income attributable to common unitholders		$	0.11		$	0.09
Distributions declared per common unit		$	0.275		$	0.275

(1)              Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.

 

See accompanying notes to consolidated financial statements.

 

F-3

 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Comprehensive Income

 

(in thousands)

 

(unaudited)

 

		For the Three Months Ended March 31,
		2013			2012
Net income		$	15,277		$	10,235
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives		462			(1,987		)
Losses on interest rate derivatives included in net income		658			1,474
Other comprehensive income (loss)		1,120			(513		)
Comprehensive income		16,397			9,722
Comprehensive loss attributable to noncontrolling interests		290			588
Comprehensive income attributable to Corporate Office Properties, L.P.		$	16,687		$	10,310

 

See accompanying notes to consolidated financial statements.

 

F-4

 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Equity

 

(Dollars in thousands)

 

(unaudited)

 

		Limited Partner Preferred Units					General Partner Preferred Units					Common Units					Accumulated Other Comprehensive			Noncontrolling Interests in			Total
		Units		Amount			Units		Amount			Units		Amount			Loss			Subsidiaries			Equity
Balance at December 31, 2011		352,000		$	8,800		8,121,667		$	216,333		76,313,112		$	972,107		$	(1,837	)	$	10,496		$	1,205,899
Costs of common units resulting from public issuance of common shares		—		—			—		—			—		(5		)	—			—			(5		)
Issuance of common units resulting from exercise of share options		—		—			—		—			5,667		82			—			—			82
Share-based compensation		—		—			—		—			83,180		3,746			—			—			3,746
Restricted common unit redemptions		—		—			—		—			(97,094	)	(2,373		)	—			—			(2,373		)
Comprehensive income		—		165			—		4,025			—		6,615			(495		)	(14		)	10,296
Distributions to owners of common and preferred units		—		(165		)	—		(4,025		)	—		(20,993		)	—			—			(25,183		)
Adjustment to arrive at fair value of noncontrolling interest		—		—			—		—			—		(903		)							(903		)
Balance at March 31, 2012		352,000		$	8,800		8,121,667		$	216,333		76,304,865		$	958,276		$	(2,332	)	$	10,482		$	1,191,559
Balance at December 31, 2012		352,000		$	8,800		12,821,667		$	333,833		85,020,528		$	1,089,391		$	(5,708	)	$	10,183		$	1,436,499
Issuance of common units resulting from public issuance of common shares		—		—			—		—			4,485,000		117,913			—			—			117,913
Issuance of common units resulting from exercise of share options		—		—			—		—			16,453		301			—			—			301
Share-based compensation		—		—			—		—			116,315		2,000			—			—			2,000
Restricted common unit redemptions		—		—			—		—			(60,960	)	(1,576		)	—			—			(1,576		)
Comprehensive income		—		165			—		6,106			—		9,342			1,074			500			17,187
Distributions to owners of common and preferred units		—		(165		)	—		(6,106		)	—		(24,643		)	—			—			(30,914		)
Contributions from noncontrolling interests in subsidiaries		—		—			—		—			—		—			—			85			85
Adjustment to arrive at fair value of noncontrolling interest		—		—			—		—			—		(848		)	—			—			(848		)
Increase in tax benefit from share-based compensation		—		—			—		—			—		(104		)	—			—			(104		)
Balance at March 31, 2013		352,000		$	8,800		12,821,667		$	333,833		89,577,336		$	1,191,776		$	(4,634	)	$	10,768		$	1,540,543

 

See accompanying notes to consolidated financial statements.

 

F-5

 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

(in thousands)

 

(unaudited)

 

		For the Three Months Ended March 31,
		2013			2012
Cash flows from operating activities
Revenues from real estate operations received		$	119,348		$	129,184
Construction contract and other service revenues received		15,695			18,170
Property operating expenses paid		(38,865		)	(39,659		)
Construction contract and other service expenses paid		(15,588		)	(12,454		)
General, administrative, leasing, business development and land carry costs paid		(8,521		)	(7,997		)
Interest expense paid		(18,018		)	(19,896		)
Previously accreted interest expense paid		(2,263		)	—
Settlement of interest rate derivatives		—			(29,738		)
Proceeds from sale of trading marketable securities		—			7,041
Exit costs on property dispositions		—			(1,108		)
Payments in connection with early extinguishment of debt		(4,803		)	—
Interest and other income received		320			252
Income taxes paid		6			(8		)
Net cash provided by operating activities		47,311			43,787
Cash flows from investing activities
Purchases of and additions to properties
Construction, development and redevelopment		(44,361		)	(35,476		)
Tenant improvements on operating properties		(5,263		)	(7,934		)
Other capital improvements on operating properties		(9,327		)	(3,360		)
Proceeds from sales of properties		—			61,230
Mortgage and other loan receivables funded or acquired		(2,231		)	(3,506		)
Leasing costs paid		(3,436		)	(2,853		)
Other		4,442			(310		)
Net cash (used in) provided by investing activities		(60,176		)	7,791
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility		99,000			71,000
Other debt proceeds		68,132			260,097
Repayments of debt
Revolving Credit Facility		(99,000		)	(337,000		)
Scheduled principal amortization		(2,512		)	(3,207		)
Other debt repayments		(125,877		)	(50		)
Deferred financing costs paid		(1,109		)	(2,044		)
Net proceeds from issuance of common units		118,389			77
Common unit distributions paid		(23,481		)	(31,460		)
Preferred unit distributions paid		(6,271		)	(4,190		)
Restricted unit redemptions		(1,576		)	(2,373		)
Other		85			—
Net cash provided by (used in) financing activities		25,780			(49,150		)
Net increase in cash and cash equivalents		12,915			2,428
Cash and cash equivalents
Beginning of period		10,594			5,559
End of period		$	23,509		$	7,987

 

See accompanying notes to consolidated financial statements.

 

F-6

 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Cash Flows (Continued)

 

(in thousands)

 

(unaudited)

 

		For the Three Months Ended March 31,
		2013			2012
Reconciliation of net income to net cash provided by operating activities:
Net income		$	15,277		$	10,235
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization		28,782			31,705
Impairment losses		1,857			5,479
Settlement of previously accreted interest expense		(2,263		)	—
Amortization of deferred financing costs		1,528			1,572
Increase in deferred rent receivable		(4,236		)	(2,559		)
Amortization of net debt discounts		710			775
Gain on sales of real estate		(2,354		)	(4,138		)
Share-based compensation		1,649			3,402
Loss on early extinguishment of debt		381			—
Other		(2,717		)	(1,423		)
Changes in operating assets and liabilities:
Decrease in accounts receivable		8,479			14,792
Decrease in restricted cash and marketable securities		483			14,276
Decrease (increase) in prepaid expenses and other assets		4,180			(9,612		)
(Decrease) increase in accounts payable, accrued expenses and other liabilities		(2,837		)	9,187
Decrease in rents received in advance and security deposits		(1,608		)	(1,901		)
Decrease in interest rate derivatives in connection with cash settlement		—			(28,003		)
Net cash provided by operating activities		$	47,311		$	43,787
Supplemental schedule of non-cash investing and financing activities:
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs		$	(5,353	)	$	11,828
Increase (decrease) in fair value of derivatives applied to AOCL and noncontrolling interests		$	1,105		$	(528	)
Dividends/distribution payable		$	29,947		$	24,544
Increase in redeemable noncontrolling interest and decrease in equity in connection with adjustment to arrive at fair value of noncontrolling interest		$	848		$	903

 

See accompanying notes to consolidated financial statements.

 

F-7

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

(unaudited)

 

1. Organization

 

Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership,” “we” or “us”) is the entity through which Corporate Office Properties Trust (“COPT” or the “Company”), a fully-integrated and self-managed real estate investment trust (“REIT”) and our sole general partner, conducts almost all of its operations and owns substantially all of its assets. As of March 31, 2013, COPT owned 96% of the outstanding common units and 97% of the outstanding preferred units in COPLP; the remaining common and preferred units in COPLP were owned by third parties, which included certain members of COPT’s Board of Trustees. Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in liquidation are substantially the same as those of COPT common shareholders. Similarly, in the case of each series of preferred units in COPLP held by COPT, there is a series of preferred shares that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

 

We focus primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of March 31, 2013, our investments in real estate included the following:

 

·                  210 operating office properties totaling 19.1 million square feet;

 

·                  10 office properties under construction or redevelopment, or for which we were contractually committed to construct, that we estimate will total approximately 1.3 million square feet upon completion, including one partially operational property included above;

 

·                  land held or under pre-construction totaling 1,703 acres (including 561 controlled but not owned) that we believe is potentially developable into approximately 19.7 million square feet; and

 

·                  a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts.

 

We own real estate both directly and through subsidiary partnerships, limited liability companies, business trusts and corporations. In addition to owning real estate, we also own subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties.

 

Because we are managed by COPT, and COPT conducts substantially all of its operations through us, we refer to COPT’s executive officers as our executive officers, and although, as a partnership, we do not have a board of trustees, we refer to COPT’s Board of Trustees as our Board of Trustees.

 

F-8

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all significant intercompany balances and transactions in consolidation.

 

We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entity’s operations but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

 

We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.

 

These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2012 included in this Exhibit 99.3 (“Exhibit 99.3”) to COPLP’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2013 (the “July 25 8-K”). The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. All adjustments are of a normal recurring nature except for errors described below. The consolidated financial statements have been prepared using the accounting policies described in the 2012 audited annual financial statements included in this Exhibit 99.3.

 

Recent Accounting Pronouncements

 

We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2013 related to the reporting of the effect of significant reclassifications from accumulated other comprehensive income. This guidance requires an entity to report, either parenthetically on the face of the financial statements or in a single footnote, changes in the components of accumulated other comprehensive income for the period. An entity is required to separately report the amount of such changes attributable to reclassifications (and the statements of operations line affected by such reclassifications) and the amount of such changes attributable to current period other comprehensive income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. Our adoption of this guidance did not affect our consolidated financial statements or disclosures.

 

3. Fair Value Measurements

 

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in 2012 audited annual financial statements included in this Exhibit 99.3.

 

F-9

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

3. Fair Value Measurements (Continued)

 

Recurring Fair Value Measurements

 

The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2013 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

 

Description		Quoted Prices in Active Markets for Identical Assets(Level 1)			Significant Other Observable Inputs(Level 2)			Significant Unobservable Inputs(Level 3)			Total
Assets:
Common stock(1)		$	743		$	—		$	—		$	743
Interest rate derivatives(2)		—			260			—			260
Warrants to purchase common stock(2)		—			420			—			420
Assets		$	743		$	680		$	—		$	1,423
Liabilities:
Interest rate derivatives		$	—		$	5,340		$	—		$	5,340
Redeemable noncontrolling interest		$	—		$	—		$	10,356		$	10,356

(1)                                 Included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet.

 

(2)                                 Included in the line entitled “prepaid expenses and other assets” on our consolidated balance sheet.

 

As discussed further in Note 5, our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest, we used a discount rate of 15.5%, which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture; a significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. We estimated the fair values of our mortgage loans receivable as discussed in Note 6 based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 7 to the consolidated financial statements, we estimated the fair value of our exchangeable senior notes based on quoted market prices for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the

 

F-10

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

3. Fair Value Measurements (Continued)

 

fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments. Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

 

For additional fair value information, please refer to Note 6 for mortgage loans receivable, Note 7 for debt and Note 8 for interest rate derivatives.

 

Nonrecurring Fair Value Measurements

 

Three Months Ended March 31, 2013

 

During the three months ended March 31, 2013, we shortened the holding period for a property in the Baltimore/Washington Corridor that we expect to sell. We determined that the carrying amount of this property will not likely be recovered from the cash flows from the operation and sale of the property over the likely remaining holding period. Accordingly, we recognized a non-cash impairment loss of $1.9 million for the amount by which the carrying value of the property exceeded its estimated fair value. The table below sets forth the fair value hierarchy of the valuation technique used by us in determining the fair value of the property (dollars in thousands):

 

Description		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total			Impairment Losses Recognized
Assets(1):
Properties, net		$	—		$	—		$	7,250		$	7,250		$	1,857

(1)                                 Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

 

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):

 

Description		Fair Value on Measurement Date			Valuation Technique		Unobservable Input		Range (Weighted Average)
Property on which impairment loss was recognized		$	7,250		Bid for property indicative of value		Indicative bid(1)		(1)

(1)                                 This fair value measurement was developed by a third party source, subject to our corroboration for reasonableness.

 

Three Months Ended March 31, 2012

 

During the three months ended March 31, 2012, we recognized non-cash impairment losses of $5.5 million for the amount by which the carrying values of certain properties exceeded their estimated

 

F-11

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

3. Fair Value Measurements (Continued)

 

fair values. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values for the three months ended March 31, 2012 (dollars in thousands):

 

Description		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total			Impairment Losses Recognized(1)
Assets(2):
Properties, net		$	—		$	—		$	92,176		$	92,176		$	5,479

(1)                       Represents impairment losses, excluding exit costs incurred of $1.1 million.

 

(2)                       Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

 

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):

 

Description		Fair Value on Measurement Date			Valuation Technique		Unobservable Input		Range (Weighted Average)
Properties on which impairment losses were recognized		$	92,176		Bid for properties indicative of value		Indicative bid(1)				(1)
					Contract of sale		Contract price(1)				(1)
					Discounted cash flow		Discount rate		11.0		%(2)
							Terminal capitalization rate		9.0		%(2)
							Market rent growth rate		3.0		%(2)
							Expense growth rate		3.0		%(2)
					Yield Analysis		Yield		12		%(2)
							Market rent rate		$	8.50 per square foot	(2)
							Leasing costs		$	20.00 per square foot	(2)

(1)                                 These fair value measurements were developed by third party sources, subject to our corroboration for reasonableness.

 

(2)                                 Only one value applied for this unobservable input.

 

4. Properties, net

 

Operating properties, net consisted of the following (in thousands):

 

		March 31, 2013			December 31, 2012
Land		$	431,152		$	427,766
Buildings and improvements		2,850,482			2,725,875
Less: accumulated depreciation		(576,299		)	(555,975		)
Operating properties, net		$	2,705,335		$	2,597,666

 

F-12

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

4. Properties, net (Continued)

 

Projects we had in development or held for future development consisted of the following (in thousands):

 

		March 31, 2013			December 31, 2012
Land		$	234,357		$	236,324
Construction in progress, excluding land		250,281			329,054
Projects in development or held for future development		$	484,638		$	565,378

 

2012 Construction Activities

 

During the three months ended March 31, 2013, we placed into service an aggregate of 236,000 square feet in three newly constructed office properties located in the Baltimore/Washington Corridor, Northern Virginia and Huntsville, Alabama. As of March 31, 2013, we had nine office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.1 million square feet upon completion, including three in the Baltimore/Washington Corridor, three in Huntsville, Alabama and three in Northern Virginia. We also had redevelopment underway on one office property in Greater Philadelphia that we estimate will total 183,000 square feet upon completion.

 

5. Real Estate Joint Ventures

 

During the three months ended March 31, 2013, we had an investment in one unconsolidated real estate joint venture accounted for using the equity method of accounting. Information pertaining to this joint venture investment is set forth below (dollars in thousands):

 

Investment Balance at(1)						Date				Nature of		Maximum Exposure
March 31, 2013			December 31, 2012			Acquired		Ownership		Activity		to Loss(2)
$	(6,420	)	$	(6,420	)	9/29/2005		20	%	Operates 16 Buildings		$	—

(1)                                 The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $4.0 million at March 31, 2013 and $4.5 million December 31, 2012 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation and our discontinuance of loss recognition under the equity method effective October 2012, as discussed below. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same and we continue to no longer recognize income or losses under the equity method.

 

(2)                                 Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages. Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that we would be required to make if certain contingent events occur (see Note 16).

 

F-13

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

5. Real Estate Joint Ventures (Continued)

 

The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands):

 

		March 31, 2013			December 31, 2012
Properties, net		$	58,130		$	58,460
Other assets		5,120			4,376
Total assets		$	63,250		$	62,836
Liabilities (primarily debt)		$	75,417		$	72,693
Owners’ equity		(12,167		)	(9,857		)
Total liabilities and owners’ equity		$	63,250		$	62,836

 

The following table sets forth condensed statements of operations for this unconsolidated real estate joint venture (in thousands):

 

		For the Three Months Ended March 31,
		2013			2012
Revenues		$	1,792		$	1,894
Property operating expenses		(786		)	(737		)
Interest expense		(2,774		)	(1,125		)
Depreciation and amortization expense		(542		)	(570		)
Net loss		$	(2,310	)	$	(538	)

 

As discussed further in our 2012 annual financial statements included in this Exhibit 99.3, in 2012, the holder of mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated our property management responsibilities; accordingly, we discontinued recognition of losses on this investment under the equity method effective in October 2012 due to our having neither the obligation nor intent to support the joint venture.

 

F-14

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

5. Real Estate Joint Ventures (Continued)

 

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at March 31, 2013 (dollars in thousands):

 

				Ownership				March 31, 2013(1)
		Date Acquired		% at 3/31/2013		Nature of Activity		Total Assets			Pledged Assets			Total Liabilities
LW Redstone Company, LLC		3/23/2010		85	%	Developing business park(2)		$	95,447		$	23,199		$	23,973
M Square Associates, LLC		6/26/2007		50	%	Operating two buildings and developing others(3)		61,059			47,361			42,675
Arundel Preserve #5, LLC		7/2/2007		50	%	Operating one building(4)		39,462			35,114			20,177
COPT-FD Indian Head, LLC		10/23/2006		75	%	Holding land parcel(5)		6,447			—			—
MOR Forbes 2 LLC		12/24/2002		50	%	Operating one building(6)		3,926			—			95
								$	206,341		$	105,674		$	86,920

(1)                                 Excludes amounts eliminated in consolidation.

 

(2)                                 This joint venture’s property is in Huntsville, Alabama.

 

(3)                                 This joint venture’s properties are in College Park, Maryland (in the Suburban Maryland region).

 

(4)                                 This joint venture’s property is in Hanover, Maryland (in the Baltimore/Washington Corridor).

 

(5)                                 This joint venture’s property is in Charles County, Maryland. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.

 

(6)                                 This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).

 

These ventures include only ones in which parties other than COPLP and COPT own interests.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.

 

F-15