UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

or

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

For the transition period from
                                                           to

Commission File Number:
1-13274


 
Mack-Cali Realty Corporation
 
(Exact name of registrant as specified in its charter)


 
Maryland
 
 22-3305147
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
         


 
343 Thornall Street, Edison, New Jersey
 
08837-2206
 
 
(Address of principal executive offices)
 
(Zip Code)
 


 
(732) 590-1000
 
(Registrant’s telephone number, including area code)


Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 ninety (90) days.  YES X  NO ___

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  x                                                                                                                     Accelerated filer  ¨
 
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)Smaller reporting company  ¨

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

As of July 24, 2008, there were 65,757,046 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

 
 

 


MACK-CALI REALTY CORPORATION

FORM 10-Q

INDEX

 
Part I
Financial Information
 
Page
       
 
Item 1.
Financial Statements (unaudited):
 
       
   
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
4
       
       
   
Consolidated Statements of Operations for the three and six month periods ended June 30, 2008 and 2007
 
     
5
       
   
Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2008
 
     
6
       
   
Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
 
     
7
       
   
Notes to Consolidated Financial Statements
8-36
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37-53
       
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53
       
 
Item 4.
Controls and Procedures
53
       
Part II
Other Information
   
       
 
Item 1.
Legal Proceedings
54
       
.
Item 1A
Risk Factors
54
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
55
       
 
Item 3.
Defaults Upon Senior Securities
55
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
55
       
 
Item 5.
Other Information
56
       
 
Item 6.
Exhibits
56
       
Signatures
   
57
       
Exhibit Index
   
58-73

 
 

 


 
 
 
 

 
2

 


MACK-CALI REALTY CORPORATION

Part I – Financial Information


Item 1.       Financial Statements

The accompanying unaudited consolidated balance sheets, statements of operations, of changes in stockholders’ equity, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements.  The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in Mack-Cali Realty Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

The results of operations for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

 
3

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)

ASSETS
June 30,
2008
December 31,
2007
Rental property
   
Land and leasehold interests
$   728,560
$   726,253
Buildings and improvements
3,775,929
3,753,088
Tenant improvements
410,150
397,132
Furniture, fixtures and equipment
8,888
8,956
 
4,923,527
4,885,429
Less – accumulated depreciation and amortization
(965,864)
(907,013)
Net investment in rental property
3,957,663
3,978,416
Cash and cash equivalents
33,777
24,716
Marketable securities available for sale at fair value
--
4,839
Investments in unconsolidated joint ventures
179,831
181,066
Unbilled rents receivable, net
110,202
107,761
Deferred charges and other assets, net
227,342
246,386
Restricted cash
12,894
13,613
Accounts receivable, net of allowance for doubtful accounts
   
of $2,408 and $1,576
19,578
36,405
     
Total assets
$4,541,287
$4,593,202
     
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
Senior unsecured notes
$1,633,079
$1,632,547
Revolving credit facility
293,000
250,000
Mortgages, loans payable and other obligations
308,268
329,188
Dividends and distributions payable
52,140
52,099
Accounts payable, accrued expenses and other liabilities
132,173
142,778
Rents received in advance and security deposits
52,835
51,992
Accrued interest payable
34,129
34,193
Total liabilities
2,505,624
2,492,797
     
Minority interests:
   
Operating Partnership
443,267
456,436
Consolidated joint ventures
1,295
1,414
Total minority interests
444,562
457,850
Commitments and contingencies
   
     
Stockholders’ equity:
   
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 10,000
   
and 10,000 shares outstanding, at liquidation preference
25,000
25,000
Common stock, $0.01 par value, 190,000,000 shares authorized,
   
65,756,271 and 65,558,073 shares outstanding
657
656
Additional paid-in capital
1,885,794
1,886,467
Dividends in excess of net earnings
(320,350)
(269,521)
Accumulated other comprehensive income (loss)
--
(47)
Total stockholders’ equity
1,591,101
1,642,555
     
Total liabilities and stockholders’ equity
$4,541,287
$4,593,202
     
     
The accompanying notes are an integral part of these consolidated financial statements.

 
4

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
REVENUES
2008
2007
2008
2007
Base rents
$148,087
$142,482
$296,690
$282,039
Escalations and recoveries from tenants
26,586
25,766
52,310
51,986
Construction services
11,305
23,469
24,066
45,810
Real estate services
3,227
4,959
6,669
7,700
Other income
3,588
3,854
7,771
6,252
Total revenues
192,793
200,530
387,506
393,787
 
       
EXPENSES
       
Real estate taxes
24,125
23,852
48,161
47,322
Utilities
19,660
15,329
41,088
32,874
Operating services
27,152
27,348
53,125
51,974
Direct construction costs
10,329
22,634
22,983
43,545
General and administrative
11,237
12,870
22,332
23,940
Depreciation and amortization
47,586
43,823
95,308
85,274
Total expenses
140,089
145,856
282,997
284,929
Operating income
52,704
54,674
104,509
108,858
         
OTHER (EXPENSE) INCOME
       
Interest expense
(31,340)
(31,333)
(63,800)
(62,269)
Interest and other investment income
302
1,571
858
3,188
Equity in earnings (loss) of unconsolidated joint ventures
884
(1,696)
(264)
(3,927)
Minority interest in consolidated joint ventures
16
214
139
441
Gain on sale of marketable securities
471
--
471
--
Total other (expense) income
(29,667)
(31,244)
(62,596)
(62,567)
Income from continuing operations before
       
minority interest in Operating Partnership
23,037
23,430
41,913
46,291
Minority interest in Operating Partnership
(4,193)
(4,197)
(7,620)
(8,418)
Income from continuing operations
18,844
19,233
34,293
37,873
Discontinued operations (net of minority interest):
       
Income from discontinued operations
--
598
--
1,037
Realized gains (losses) and unrealized losses
 
     
on disposition of rental property, net
--
31,747
--
31,747
Total discontinued operations, net
--
32,345
--
32,784
Net income
18,844
51,578
34,293
70,657
Preferred stock dividends
(500)
(500)
(1,000)
(1,000)
Net income available to common shareholders
$  18,344
$  51,078
$  33,293
$  69,657
         
Basic earnings per common share:
       
Income from continuing operations
$      0.28
$      0.28
$     0.51
$      0.55
Discontinued operations
$          --
$      0.47
$         --
$      0.49
Net income available to common shareholders
$      0.28
$      0.75
$     0.51
$      1.04
         
Diluted earnings per common share:
 
 
   
Income from continuing operations
$     0.28
$      0.28
$      0.51
$      0.55
Discontinued operations
$         --
$      0.47
$        --
$      0.49
Net income available to common shareholders
$     0.28
$      0.75
$      0.51
$      1.04
         
Dividends declared per common share
$     0.64
$      0.64
$      1.28
$      1.28
         
Basic weighted average shares outstanding
65,423
67,799
65,397
66,753
         
Diluted weighted average shares outstanding
80,585
83,193
80,547
82,220
         
         
The accompanying notes are an integral part of these consolidated financial statements.

 
5

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) (unaudited)



                 
         
Accumulated
     
     
Additional
Dividends in
Other
Total
   
 
Preferred Stock
Common Stock
Paid-In
Excess of
Comprehensive
Stockholders’
 
Comprehensive
 
Shares
Amount
Shares
Par Value
Capital
Net Earnings
Income (Loss)
Equity
 
Income
Balance at January 1, 2008
10
$25,000
65,558
$656
$1,886,467
$(269,521)
$(47)
$1,642,555
 
--
Net income
--
--
--
--
--
34,293
--
34,293
 
$34,293
Preferred stock dividends
--
--
--
--
--
(1,000)
--
(1,000)
 
--
Common stock dividends
--
--
--
--
--
(84,122)
--
(84,122)
 
--
Redemption of common units
                   
  for common stock
--
--
54
1
1,644
--
--
1,645
 
--
Shares issued under Dividend
                   
  Reinvestment and Stock
       
 
         
  Purchase Plan
--
--
4
--
171
--
--
171
 
--
Stock options exercised
--
--
39
--
1,101
--
--
1,101
 
--
Comprehensive Gain:
 
                 
  Unrealized holding gain
                   
  on marketable securities
                   
  available for sale
--
--
--
--
--
--
518
518
 
518
Directors Deferred comp. plan
--
--
--
--
190
--
--
190
 
--
Issuance of restricted stock
--
--
253
--
--
--
--
--
 
--
Stock Compensation
--
--
--
2
1,448
--
--
1,450
 
--
Cancellation of restricted stock
--
--
(1)
--
(31)
--
--
(31)
 
--
Repurchase of Common Stock
--
--
(151)
(2)
(5,196)
--
--
(5,198)
 
--
Reclassification adjustment for
   
 
             
  realized gain included in
                   
  net income
--
--
--
--
--
--
(471)
(471)
 
(471)
Balance at June 30, 2008
10
$25,000
65,756
$657
$1,885,794
$(320,350)
--
$1,591,101
 
$34,340
                     
                     
The accompanying notes are an integral part of these consolidated financial statements.
   





 
6

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

 
Six Months Ended
 
June 30,
CASH FLOWS FROM OPERATING ACTIVITIES
2008
2007
Net income
$   34,293
$   70,657
Adjustments to reconcile net income to net cash provided by
   
operating activities:
   
Depreciation and amortization, including related intangibles
92,155
85,274
Depreciation and amortization on discontinued operations
--
424
Stock options expense
--
66
Amortization of stock compensation
1,450
1,739
Amortization of deferred financing costs and debt discount
1,416
1,421
Equity in (earnings) loss of unconsolidated joint ventures
264
3,927
Minority interest in Operating Partnership
7,620
8,418
Minority interest in consolidated joint ventures
(139)
(441)
Minority interest in income from discontinued operations
--
236
Gain on sale of marketable securities
(471)
--
Realized (gain) losses and unrealized losses on disposition
   
  of rental property (net of minority interest)
--
(31,747)
Distribution of cumulative earnings from unconsolidated joint ventures
2,341
1,000
Changes in operating assets and liabilities:
 
 
Increase in unbilled rents receivable, net
(2,441)
(5,921)
Increase in deferred charges and other assets, net
(6,688)
(18,316)
Decrease (increase) in accounts receivable, net
16,827
(1,793)
(Decrease) increase in accounts payable, accrued expenses and other liabilities
(6,298)
3,473
Increase in rents received in advance and security deposits
843
5,144
Decrease in accrued interest payable
(64)
(274)
     
Net cash provided by operating activities
$ 141,108
$ 123,287
     
CASH FLOWS FROM INVESTING ACTIVITIES
   
Additions to rental property and related intangibles
$  (50,861)
$(327,864)
Repayments of notes receivable
84
81
Investment in unconsolidated joint ventures
(4,153)
(20,141)
Distribution from unconsolidated joint venture
2,924
--
Proceeds from sale of rental property
--
45,755
Proceeds from sale of marketable securities
5,375
--
Increase in restricted cash
719
(1,347)
     
Net cash used in investing activities
$  (45,912)
$(303,516)
     
CASH FLOWS FROM FINANCING ACTIVITIES
   
Borrowings from revolving credit facility
$ 250,100
$ 269,000
Repayment of revolving credit facility
(207,100)
(299,000)
Borrowings from money market loans
83,000
--
Repayment from money market loans
(83,000)
--
Repayment of mortgages, loans payable and other obligations
(20,813)
(21,781)
Proceeds from offering of Common Stock
--
251,732
Payment of financing costs
--
(1,414)
Repurchase of Common Stock
(5,198)
--
Proceeds from stock options exercised
1,101
3,614
Payment of dividends and distributions
(104,225)
(104,242)
     
Net cash (used in) provided by financing activities
$  (86,135)
$   97,909
     
Net increase (decrease) in cash and cash equivalents
$     9,061
$  (82,320)
Cash and cash equivalents, beginning of period
24,716
 101,223
     
Cash and cash equivalents, end of period
$   33,777
$   18,903
     
     
The accompanying notes are an integral part of these consolidated financial statements.
   

 
7

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1.  
ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION
Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the “Company”), is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) providing leasing, management, acquisition, development, construction and tenant-related services for its properties and third-parties.  As of June 30, 2008, the Company owned or had interests in 294 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 33.7 million square feet, which are comprised of 283 buildings, primarily office and office/flex buildings, totaling approximately 33.3 million square feet (which include 38 buildings, primarily office buildings, aggregating 4.5 million square feet owned by unconsolidated joint ventures in which the Company has investment interests), six industrial/warehouse buildings totaling approximately 387,400 square feet, two retail properties totaling approximately 17,300 square feet, a hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and two parcels of land leased to others.  The Properties are located in six states in the Northeast, plus the District of Columbia.

BASIS OF PRESENTATION
The accompanying consolidated financial statements include all accounts of the Company, its majority-owned and/or controlled subsidiaries, which consist principally of Mack-Cali Realty, L.P. (the “Operating Partnership”), and variable interest entities for which the Company has determined itself to be the primary beneficiary, if any.  See Note 2: Significant Accounting Policies – Investments in Unconsolidated Joint Ventures for the Company’s treatment of unconsolidated joint venture interests.  Intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.


Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.


2.  
SIGNIFICANT ACCOUNTING POLICIES

Rental
Property
Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized.  Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of development.  Included in total rental property is construction, tenant improvement and development in-progress of $131,406,000 and $126,470,000 (including land of $90,849,000 and $68,328,000) as of June 30, 2008 and December 31, 2007, respectively.  Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.  Fully-depreciated assets are removed from the accounts.

The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup).  If portions of a rental project are substantially completed and occupied by tenants, or held available for occupancy, and other portions have not yet reached that stage, the substantially completed portions are accounted for as a separate project.  The Company allocates costs incurred between the portions under construction and the portions substantially completed and held available for occupancy, and capitalizes only those costs associated with the portion under construction.
 
 
8


 
Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives are as follows:

Leasehold interests
Remaining lease term
Buildings and improvements
5 to 40 years
Tenant improvements
The shorter of the term of the
 
related lease or useful life
Furniture, fixtures and equipment
5 to 10 years

Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships.  The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values.  In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information.  The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

Above-market and below-market lease values for acquired properties are recorded based on the present value, (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases.

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant.  Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases.  In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions.  In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.  Characteristics considered by management in valuing tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals.  The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.  The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s real estate properties held for use may be impaired.  A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property.  The Company’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.  Management does not believe that the value of any of the Company’s rental properties is impaired.
 
 
9


 
Rental Property
 
Held for Sale and
 
Discontinued
 
Operations
When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  If, in management’s opinion, the estimated net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established.  Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented.  See Note 5: Discontinued Operations.

If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used.  A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.

Investments in
Unconsolidated
Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures for which Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46”) does not apply under the equity method of accounting as the Company exercises significant influence, but does not control these entities.  These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions.

 
FIN 46 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”).  Generally, FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired.  An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment.  Management does not believe that the value of any of the Company’s investments in unconsolidated joint ventures is impaired.  See Note 3: Investments in Unconsolidated Joint Ventures.
 
 
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Cash and Cash
 
Equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.

Marketable
 
Securities
The Company classifies its marketable securities among three categories: held-to-maturity, trading and available-for-sale.  Unrealized holding gains and losses relating to available-for-sale securities are excluded from earnings and reported as other comprehensive income (loss) in stockholders’ equity until realized.  A decline in the market value of any marketable security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value.  Any impairment would be charged to earnings and a new cost basis for the security established.

The fair value of the marketable securities was determined using level I inputs under FAS 157.  Level I inputs represent quoted prices available in an active market for identical investments as of the reporting date.

The Company received $0 and $65,000 in dividend income from its holdings in marketable securities during the three and six months ended June 30, 2008, respectively.  During the three months ended June 30, 2008, the Company disposed of its marketable securities, and realized a gain of $471,000.

Deferred
Financing Costs
Costs incurred in obtaining financing are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related indebtedness.  Amortization of such costs is included in interest expense and was $708,000 and $713,000 for the three months ended June 30, 2008 and 2007, respectively, and $1,416,000 and $1,421,000 for the six months ended June 30, 2008 and 2007, respectively.

 
Deferred
Leasing Costs
Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization.  Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease.  Certain employees of the Company are compensated for providing leasing services to the Properties.  The portion of such compensation, which is capitalized and amortized, approximated $910,000 and $927,000 for the three months ended June 30, 2008 and 2007, respectively, and $1,654,000 and $2,064,000 for the six months ended June 30, 2008 and 2007, respectively.

Derivative
Instruments
The Company measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract.  For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings.  For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings.  Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.

Revenue
Recognition
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements.  Above-market and below-market lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases.  The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.  Escalations and recoveries from tenants are received from tenants for certain costs as provided in the lease agreements.  These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs.  See Note 12: Tenant Leases.  Construction services revenue includes fees earned and reimbursements received by the Company for providing construction management and general contractor services to clients.  Construction services revenue is recognized on the percentage of completion method.  Using this method, profits are recorded on the basis of estimates of the overall profit and percentage of completion of individual contracts.  A portion of the estimated profits is accrued based upon estimates of the percentage of completion of the construction contract.  This revenue recognition method involves inherent risks relating to profit and cost estimates.  Real estate services revenue includes property management, facilities management, leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Other income includes income from parking spaces leased to tenants, income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations.
 
 
 
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Allowance for
Doubtful Accounts
Management periodically performs a detailed review of amounts due from tenants and clients to determine if accounts receivable balances are impaired based on factors affecting the collectibility of those balances.  Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income.

 
Income and
Other Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally will not be subject to corporate federal income tax (including alternative minimum tax) on net income that it currently distributes to its shareholders, provided that the Company satisfies certain organizational and operational requirements including the requirement to distribute at least 90 percent of its REIT taxable income to its shareholders.  The Company has elected to treat certain of its corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”).  In general, a TRS of the Company may perform additional services for tenants of the Company and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated).  A TRS is subject to corporate federal income tax.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.  The Company is subject to certain state and local taxes.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FAS No. 109”) on January 1, 2007.  As a result of the implementation of FIN 48, the Company recognized no material adjustments regarding its tax accounting treatment.  The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which is included in general and administrative expense.

 
 
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Earnings
 
Per Share
The Company presents both basic and diluted earnings per share (“EPS”).  Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

Dividends and
 
Distributions
Payable
The dividends and distributions payable at June 30, 2008 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (65,755,730 shares), and distributions payable to minority interest common unitholders of the Operating Partnership (14,931,139 common units) for all such holders of record as of July 3, 2008 with respect to the second quarter 2008.  The second quarter 2008 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.64 per common share and unit were approved by the Board of Directors on June 16, 2008.  The common stock dividends and common unit distributions payable were paid on July 14, 2008.  The preferred stock dividends payable were paid on July 15, 2008.

The dividends and distributions payable at December 31, 2007 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (65,637,709 shares), and distributions payable to minority interest common unitholders of the Operating Partnership (14,985,538 common units) for all such holders of record as of January 4, 2008 with respect to the fourth quarter 2007.  The fourth quarter 2007 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.64 per common share and unit were approved by the Board of Directors on December 4, 2007.  The common stock dividends and common unit distributions payable were paid on January 14, 2008.  The preferred stock dividends payable were paid on January 15, 2008.

 
Costs Incurred For
 
Stock Issuances
Costs incurred in connection with the Company’s stock issuances are reflected as a reduction of additional paid-in capital.

 
Stock
 
Compensation
The Company accounts for stock options and restricted stock awards granted prior to 2002 using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,  “Accounting for Stock Issued to Employees,” and related Interpretations (“APB No. 25”).  Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the exercise price of the option granted.  Compensation cost for stock options is recognized ratably over the vesting period.  The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of the Company’s stock on the business day preceding the grant date.  Accordingly, no compensation cost has been recognized under the Company’s stock option plans for the granting of stock options made prior to 2002.  Restricted stock awards granted prior to 2002 are valued at the vesting dates of such awards with compensation cost for such awards recognized ratably over the vesting period.

In 2002, the Company adopted the provisions of FASB No. 123, and in 2006, the Company adopted the provisions of FASB No. 123(R), which did not have a material effect on the Company’s financial position and results of operations.  These provisions require that the estimated fair value of restricted stock (“Restricted Stock Awards”) and stock options at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded restricted stock and stock options expense of $715,000 and $907,000 for the three months ended June 30, 2008 and 2007, respectively, and $1,420,000 and $1,804,000 for the six months ended June 30, 2008 and 2007, respectively.
 
 
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Other
 
Comprehensive
 
Income
Other comprehensive income (loss) includes items that are recorded in equity, such as unrealized holding gains or losses on marketable securities available for sale.


3.  
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The debt of the Company’s unconsolidated joint ventures generally are non-recourse to the Company, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions and material misrepresentations, and except as otherwise indicated below.

PLAZA VIII AND IX ASSOCIATES, L.L.C.
Plaza VIII and IX Associates, L.L.C. is a joint venture between the Company and Columbia Development Company, L.L.C. (“Columbia”).  The venture was formed to acquire land for future development, located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside Financial Center office complex.  The Company and Columbia each hold a 50 percent interest in the venture.  Among other things, the partnership agreement provides for a preferred return on the Company’s invested capital in the venture, in addition to the Company’s proportionate share of the venture’s profit, as defined in the agreement.  The venture owns undeveloped land currently used as a parking facility.

RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)
On August 20, 1998, the Company entered into a joint venture with S.B. New York Realty Corp. to form Ramland Realty Associates L.L.C.  The venture was formed to own, manage and operate One Ramland Road, a 232,000 square foot office/flex building and adjacent developable land, located in Orangeburg, New York.  In August 1999, the joint venture completed redevelopment of the property and placed the office/flex building in service.  The Company holds a 50 percent interest in the joint venture.  The venture has a mortgage loan with a $14.7 million balance at June 30, 2008 collateralized by its office/flex property.  The mortgage bears interest at a rate of LIBOR plus 175 basis points and is scheduled to mature in January 2009.  The venture recorded an impairment loss of approximately $4.3 million on its rental property as of December 31, 2007.  The mortgage lender has notified the joint venture that its mortgage loan is in default due to non-receipt of debt service payments.  The joint venture is currently in discussion with the lender regarding a deed in lieu of foreclosure.

The Company performs management, leasing and other services for the property owned by the joint venture and recognized $16,000 and $16,000 in fees for such services for the three months ended June 30, 2008 and 2007, respectively, and $32,000 and $32,000 for the six months ended June 30, 2008 and 2007, respectively.

SOUTH PIER AT HARBORSIDE – HOTEL DEVELOPMENT
On November 17, 1999, the Company entered into a joint venture with Hyatt Corporation (“Hyatt”) to develop a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey, which was completed and commenced initial operations in July 2002.  The Company owns a 50 percent interest in the venture.

The venture has a mortgage loan with a balance as of June 30, 2008 of $68.7 million collateralized by the hotel property.  The loan carries an interest rate of 6.15 percent and matures in November 2016.  The venture has a loan with a balance as of June 30, 2008 of $7.0 million with the City of Jersey City, provided by the U.S. Department of Housing and Urban Development.  The loan currently bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 2020.  The Company has posted a $7.0 million letter of credit in support of this loan, $3.5 million of which is indemnified by Hyatt.

RED BANK CORPORATE PLAZA L.L.C./RED BANK CORPORATE PLAZA II, L.L.C.
On March 23, 2006, the Company entered into a joint venture with The PRC Group (“PRC”) to form Red Bank Corporate Plaza L.L.C.  The venture was formed to develop Red Bank Corporate Plaza, a 92,878 square foot office building located in Red Bank, New Jersey, which has been fully pre-leased to Hovnanian Enterprises, Inc. for a 10-year term.  The Company holds a 50 percent interest in the venture.  PRC contributed the vacant land for the development of the office building as its initial capital in the venture.  The Company funded the costs of development up to the value of the land contributed by PRC of $3.5 million as its initial capital.
 
 
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On October 20, 2006, the venture entered into a $22.0 million construction loan with a commercial bank collateralized by the land and development project.  The loan (with a balance as of June 30, 2008 of $19.2 million) carried an interest rate of LIBOR plus 130 basis points through March 2008.  In April 2008, the interest rate was reduced to LIBOR plus 125 basis points and the maturity was extended one year to April 2009.  The loan currently has two one-year extension options subject to certain conditions, each of which requires payment of a fee.

In September 2007, the joint venture completed development of the property and placed the office building in service.  The Company performs management, leasing and other services for the property owned by the joint venture and recognized $33,000 and $0 in fees for such services for the three months ended June 30, 2008 and 2007, respectively, and $51,500 and $0 for the six months ended June 30, 2008 and 2007, respectively.

On July 20, 2006, the Company entered into a second joint venture agreement with PRC to form Red Bank Corporate Plaza II L.L.C.  The venture was formed to hold land on which it plans to develop Red Bank Corporate Plaza II, an 18,561 square foot office building located in Red Bank, New Jersey.  The Company holds a 50 percent interest in the venture.  The terms of the venture are similar to Red Bank Corporate Plaza L.L.C.  PRC contributed the vacant land as its initial capital in the venture.

MACK-GREEN-GALE LLC
On May 9, 2006, as part of the Gale/Green transactions completed in May 2006, the Company entered into a joint venture, Mack-Green-Gale LLC (“Mack-Green”), with SL Green, pursuant to which Mack-Green holds a 96 percent interest in and acts as general partner of Gale SLG NJ Operating Partnership, L.P. (the “OP LP”).  The Company’s acquisition cost for its interest in Mack-Green was approximately $125 million, which was funded primarily through borrowing under the Company’s revolving credit facility.  The OP LP owns 100 percent of entities which owned 25 office properties (the “OP LP Properties”) which aggregate 3.5 million square feet (consisting of 17 office properties aggregating 2.3 million square feet located in New Jersey and eight properties aggregating 1.2 million square feet located in Troy, Michigan), as well as a minor, non-controlling interest in four office properties aggregating 419,000 square feet located in Naperville, Illinois, which was subsequently sold.  In December 2007, the OP LP sold its eight properties located in Troy, Michigan for $83.5 million.  The venture recognized a loss of approximately $22.3 million from the sale. Included in the Company’s equity in earnings for the quarter ended December 31, 2007 was $223,000 in loss related to the sale.

As defined in the Mack-Green operating agreement, the Company shares decision-making equally with SL Green regarding:  (i) all major decisions involving the operations of Mack-Green; and (ii) overall general partner responsibilities in operating the OP LP.

The Mack-Green operating agreement generally provides for profits and losses to be allocated as follows:

(i)  
99 percent of Mack-Green’s share of the profits and losses from 10 specific OP LP Properties allocable to the Company and one percent allocable to SL Green;
(ii)  
one percent of Mack-Green’s share of the profits and losses from eight specific OP LP Properties and its minor interest in four office properties allocable to the Company and 99 percent allocable to SL Green; and
(iii)  
50 percent of all other profits and losses allocable to the Company and 50 percent allocable to SL Green.

Substantially all of the OP LP Properties are encumbered by mortgage loans with an aggregate outstanding principal balance of $278.4 million at June 30, 2008.  $187.4 million of the mortgage loans bear interest at a weighted average fixed interest rate of 6.26 percent per annum and mature at various times through May 2016.  $91 million of the mortgage loans bear interest at a floating rate ranging from LIBOR plus 275 basis points to LIBOR per annum and mature at various times through May 2009, with two one-year extension options, subject to certain conditions and the payment of a fee.  Substantially all of the floating rate mortgage loans are provided by an affiliate of SL Green.

The Company performs management, leasing, and other services for the properties owned by the joint venture and recognized $1.0 million and $636,000 in income (net of $816,000 and $267,000 in direct costs) for such services for the three months ended June 30, 2008 and 2007, respectively, and $2.0 million and $1.2 million in income (net of $1.3 million and $796,300 in direct costs) for the six months ended June 30, 2008 and 2007, respectively.

 
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GE/GALE FUNDING LLC (PFV)
The Gale agreement signed as part of the Gale/Green transactions in May 2006 provides for the Company to acquire certain ownership interests in real estate projects (the “Non-Portfolio Properties”), subject to obtaining certain third party consents and the satisfaction of various project-related and/or other conditions.  Each of the Company’s acquired interests in the Non-Portfolio Properties provide for the initial distributions of net cash flow solely to the Company, and thereafter an affiliate of Mr. Gale (“Gale Affiliate”) has participation rights (“Gale Participation Rights”) in 50 percent of the excess net cash flow remaining after the distribution to the Company of the aggregate amount equal to the sum of: (a) the Company’s capital contributions, plus (b) an internal rate of return (“IRR”) of 10 percent per annum, accruing on the date or dates of the Company’s investments.

On May 9, 2006, as part of the Gale/Green transactions, the Company acquired from a Gale Affiliate for $1.8 million a 50 percent controlling interest in GMW Village Associates, LLC (“GMW Village”).  GMW Village holds a 20 percent interest in GE/Gale Funding LLC (“GE Gale”).  GE Gale owns a 100 percent interest in the entity owning Princeton Forrestal Village, a mixed-use, office/retail complex aggregating 527,015 square feet and located in Plainsboro, New Jersey (“Princeton Forrestal Village” or “PFV”).

In addition to the cash consideration paid to acquire the interest, the Company provided a Gale affiliate with the Gale Participation Rights.

The operating agreement of GE Gale, which is owned 80 percent by GEBAM, Inc., provides for, among other things, distributions of net cash flow, initially, in proportion to each member’s interest and subject to adjustment upon achievement of certain financial goals, as defined in the operating agreement.

GE Gale has a mortgage loan with a balance of $52.8 million at June 30, 2008.  The loan bears interest at a rate of LIBOR plus 275 basis points and matures on January 9, 2009, with an extension option through January 9, 2011.

The Company performs management, leasing, and other services for PFV and recognized $219,000 and $173,000 in income (net of $110,000 and $509,000 in direct costs) for such services for the three months ended June 30, 2008 and 2007, respectively, and $437,700 and $384,500 in income (net of $256,100 and $1.2 million in direct costs) for the six months ended June 30, 2008 and 2007, respectively.

ROUTE 93 MASTER LLC (“Route 93 Participant”)/ROUTE 93 BEDFORD MASTER LLC (with the Route 93 Participant, collectively, the “Route 93 Venture”)
On June 1, 2006, the Route 93 Venture was formed between the Route 93 Participant, a majority-owned subsidiary of the Company, having a 30 percent interest and the Commingled Pension Trust Fund (Special Situation Property) of JPMorgan Chase Bank having a 70 percent interest, for the purpose of acquiring seven office buildings, aggregating 666,697 square feet, located in the towns of Andover, Bedford and Billerica, Massachusetts.  Profits and losses are shared by the partners in proportion to their respective interests until the investment yields an 11 percent IRR, then sharing will shift to 40/60, and when the IRR reaches 15 percent, then sharing will shift to 50/50.

The Route 93 Participant is a joint venture between the Company and a Gale affiliate.  Profits and losses are shared by the partners under this venture in proportion to their respective interests (83.3/16.7) until the investment yields an 11 percent IRR, then sharing will shift to 50/50.

The Route 93 Ventures has a mortgage loan with an amount not to exceed $58.6 million, with a $42.5 million balance at June 30, 2008, collateralized by its office properties.  The loan provides the venture the ability to draw additional monies for qualified leasing and capital improvement costs.  The loan bears interest at a rate of LIBOR plus 220 basis points and matures on July 11, 2009, with two one-year extension options, subject to certain conditions and the payment of a fee.

The Company performs services for Route 93 Master LLC and Route 93 Bedford Master LLC and recognized $15,800 and $0 in fees for such services for the three months ended June 30, 2008 and 2007, respectively, and $32,500 and $0 for the six months ended June 30, 2008 and 2007, respectively.


 
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GALE KIMBALL, L.L.C.
On June 15, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Kimball, LLC (“M-C Kimball”).  M-C Kimball was formed for the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership interest in Gale Kimball, L.L.C. (“Gale Kimball”), an entity holding a 25 percent interest in 100 Kimball Drive LLC (“100 Kimball”), which developed and placed in service a 175,000 square foot office property that has been substantially pre-leased to a single tenant, located at 100 Kimball Drive, Parsippany, New Jersey (the “Kimball Property”).

The operating agreement of M-C Kimball provides, among other things, for the Gale Participation Rights (of which Mark Yeager, an Executive Vice President of the Company, has a direct 26 percent interest).

Gale Kimball is owned 33.33 percent by M-C Kimball and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”).  The operating agreement of Gale Kimball provides, among other things, for the distribution of net cash flow, initially, in accordance with its members’ respective membership interests and, upon achievement of certain financial conditions, 50 percent to each of the Company and Hampshire.

100 Kimball is owned 25 percent by Gale Kimball and 75 percent by 100 Kimball Drive Realty Member LLC, an affiliate of JPMorgan (“JPM”). The operating agreement of 100 Kimball provides, among other things, for the distributions to be made in the following order:

(i)  
first, to JPM, such that JPM is provided with an annual 12 percent compound preferred return on Preferred Equity Capital Contributions (as such term is defined in the operating agreement of 100 Kimball and largely comprised of development and construction costs);
(ii)  
second, to JPM, as return of Preferred Equity Capital Contributions until complete repayment of such Preferred Equity Capital Contributions;
(iii)  
third, to each of JPM and Gale Kimball in proportion to their respective membership interests until each member is provided, as a result of such distributions, with an annual twelve percent compound return on the Member’s Capital Contributions (as defined in the operating agreement of 100 Kimball, and excluding Preferred Equity Capital Contributions, if any); and
(iv)  
fourth, 50 percent to each of JPM and Gale Kimball.

On September 21, 2007, 100 Kimball obtained a $47 million mortgage loan which bears interest at a rate of 5.95 percent and matures in September 2012.

The Company performs management, leasing, and other services for the property owned by 100 Kimball for which it recognized $58,000 and $815,000 in income (net of $0 and $1.4 million in direct costs) for the three months ended June 30, 2008, and 2007, respectively, and $123,400 and $828,000 in income (net of $1.0 million and $2.1 million in direct costs) for the six months ended June 30, 2008 and 2007, respectively.

55 CORPORATE PARTNERS, LLC
On June 9, 2006, the Company entered into a joint venture with a Gale Affiliate to form 55 Corporate Partners L.L.C. (“55 Corporate”).  55 Corporate was formed for the sole purpose of acquiring from a Gale Affiliate a 50 percent interest in SLG 55 Corporate Drive II LLC (“SLG 55”), an entity presently holding a 100 percent indirect condominium interest in a vacant land parcel located in Bridgewater, New Jersey, which can accommodate development of an approximately 200,000 square foot office building (the “55 Corporate Property”).  The remaining 50 percent in SLG 55 is owned by SLG Gale 55 Corporate LLC, an affiliate of SL Green Realty Corp. (“SLG Gale 55”).

In November 2007, Sanofi-Aventis U.S. Inc. (“Sanofi”), which occupies neighboring buildings, exercised its option to cause the venture to construct a building on the Property and has signed a lease thereof.  The lease has a term of fifteen years, subject to three five-year extension options.  The construction of the building, estimated to cost approximately $58 million, is not required to commence until July 1, 2009 for a July 2011 delivery; however, if Sanofi gives a Construction Start Date Acceleration Notice in accordance with the provisions of its lease, then construction shall promptly commence after the necessary permits are obtained, even if such construction start date shall occur prior to July 1, 2009.
 
 
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The operating agreement of 55 Corporate provides, among other things, for the Gale Participation Rights (of which Mr. Yeager has a direct 26 percent interest).  If Mr. Gale receives any payments with respect to a Sanofi lease on the development property, Mr. Gale has agreed to pay to Mr. Yeager 26 percent of such payments.  
 
The operating agreement of SLG 55 provides, among other things, for the distribution of the available net cash flow to each of 55 Corporate and SLG Gale 55 in proportion to their respective membership interests in SLG 55 (50 percent each).

12 VREELAND ASSOCIATES, L.L.C.
On September 8, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Vreeland, LLC (“M-C Vreeland”).  M-C Vreeland was formed for the sole purpose of acquiring a Gale Affiliate’s 50 percent membership interest in 12 Vreeland Associates, L.L.C., an entity owning an office property located at 12 Vreeland Road, Florham Park, New Jersey.

The operating agreement of M-C Vreeland provides, among other things, for the Gale Participation Rights (of which Mr. Yeager has a direct 15 percent interest).

The office property at 12 Vreeland is a 139,750 square foot office building that is fully leased to a single tenant through June 15, 2012.  The property is subject to a mortgage loan, which matures on July 1, 2012, and bears interest at 6.9 percent per annum.  As of June 30, 2008, the outstanding balance on the mortgage note was $8 million.

Under the operating agreement of 12 Vreeland Associates, L.L.C., M-C Vreeland has a 50 percent interest, with S/K Florham Park Associates, L.L.C. (the managing member) and its affiliate holding the other 50 percent.

BOSTON-FILENES
On October 20, 2006, the Company formed a joint venture (the “MC/Gale JV LLC”) with Gale International/426 Washington St. LLC (“Gale/426”), which, in turn, entered into a joint venture (the “Vornado JV LLC”) with VNO 426 Washington Street JV LLC (“Vornado”), an affiliate of Vornado Realty LP, which was formed to acquire and redevelop the Filenes property located in the Downtown Crossing district of Boston, Massachusetts (the “Filenes Property”).

On January 25, 2007, (i) each of M-C/Gale JV LLC, Gale and Washington Street Realty Member LLC (“JPM”) formed a joint venture (“JPM JV LLC”), (ii) M-C/Gale JV LLC assigned its entire 50 percent ownership interest in the Vornado JV LLC to JPM JV LLC, (iii) the Limited Liability Company Agreement of Vornado JV LLC was amended to reflect, among other things, the change in the ownership structure described in subsection (ii) above, and (iv) the Limited Liability Company Agreement of MC/Gale JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described in subsection (ii) above.  The Vornado JV LLC acquired the Filenes Property on January 29, 2007, for approximately $100 million.

As a result of the foregoing transactions, (i) the Filenes Property is owned by Vornado JV LLC, (ii) Vornado JV LLC is owned 50 percent by each of Vornado and JPM JV LLC, (iii) JPM JV LLC is owned 30 percent by M-C/Gale JV LLC, 70 percent by JPM and managed by Gale/426, which has no ownership interest in JPM JV LLC, and (iv) M-C/Gale JV LLC is owned 99.99 percent by the Company and 0.01 percent by Gale/426.  Thus, the Company holds approximately a 15 percent indirect ownership interest in the Vornado JV LLC and the Filenes Property.

Distributions are made (i) by Vornado JV LLC in proportion to its members’ respective ownership interests, (ii) by JPM JV LLC (a) initially, in proportion to its members’ respective ownership interests until JPM’s investment yields an 11 percent IRR, (b) thereafter, 60/40 to JPM and MC/Gale JV LLC, respectively, until JPM’s investment yields a 15 percent IRR and (c) thereafter, 50/50 to JPM and MC/Gale JV LLC, respectively, and (iii) by MC/Gale JV LLC (w) initially, in proportion to its members’ respective ownership interests until each member has received a 10 percent IRR on its investment, (x) thereafter, 65/35 to the Company and Gale/426, respectively, until the Company’s investment yields a 15 percent IRR, (y) if by the time the Company receives a 15 percent IRR on its investment, Gale/426 has not done so, 100 percent to Gale/426 until Gale/426’s investment yields a 15 percent IRR, and (z) thereafter,  50/50 to each of the Company and Gale/426.
 
 
18


 
The joint venture’s current plans for the development of the Filenes Property include approximately 1.5 million square feet consisting of office, retail, condominium apartments, hotel and a garage.  The joint venture is currently pursuing project financing.

NKFGMS OWNERS, LLC
On December 28, 2006, the Company contributed its facilities management business, which was acquired on May 9, 2006 as part of the Gale/Green transactions, to a newly-formed joint venture called NKFGMS Owners, LLC.  With the contribution, the Company received $600,000 in cash and a 40 percent interest in the joint venture.  In connection with the Contribution, the Company recognized a loss of approximately $1.5 million.  The joint venture operating agreement provided for, among other things, profits and losses generally to be allocated in proportion to each member’s interest.

On September 21, 2007, the Company sold its 40 percent interest in NKFGMS to its joint venture partner for net proceeds of $575,000, and recorded a gain of $19,000 on the sale.

GALE JEFFERSON, L.L.C.
On August 22, 2007, the Company entered into a joint venture with a Gale Affiliate to form M-C Jefferson, L.L.C. (“M-C Jefferson”).  M-C Jefferson was formed for the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership interest in Gale Jefferson, L.L.C. (“Gale Jefferson”), an entity holding a 25 percent interest in One Jefferson Road LLC (“One Jefferson”), which is developing a 100,000 square foot office property located at 1 Jefferson Road, Parsippany, New Jersey (the “Jefferson Property”).

The operating agreement of M-C Jefferson provides, among other things, for the Gale Participation Rights (of which Mark Yeager, an Executive Vice President of the Company, has a direct 26 percent interest).  Gale Jefferson is owned 33.33 percent by M-C Jefferson and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”).  The operating agreements of Gale Jefferson provides, among other things, for the distribution of net cash flow, first, in accordance with its member’s respective interests until each member is provided, as a result of such distributions, with an annual 12 percent compound return on the Member’s Capital Contributions, as defined in the operating agreement and secondly, 50 percent to each of the Company and Hampshire.

One Jefferson is owned 25 percent by Gale Jefferson and 75 percent by One Jefferson Road Realty Member LLC, an affiliate of JPMorgan (“JPM”).  The operating agreement of One Jefferson provides, among other things, for the distribution of net cash flow, first, in accordance with its members’ respective interests until each member is provided, as a result of such distributions, with an annual 12 percent compound return on the Member’s Capital Contributions, as defined in the operating agreement and secondly, 50 percent to JPM and Gale Jefferson.  One Jefferson has a construction loan in an amount not to exceed $21 million (with $5.3 million drawn as of June 30, 2008), bearing interest at a rate of LIBOR plus 160 basis points and maturing on October 24, 2010 with a one-year extension option.

The Company performs management, leasing and other services for Gale Jefferson and recognized $113,000 and $0 in income (net of $3.7 million and $0 in direct costs) for such services for the three months ended June 30, 2008 and 2007, respectively, and $174,000 and $0 in income (net of $5.7 million and $0 in direct costs) for the six months ended June 30, 2008 and 2007, respectively.



 
19

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of June 30, 2008 and December 31, 2007:  (dollars in thousands)

 
June 30, 2008
 
 
Plaza
   
Red Bank
Mack-
Princeton
             
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Boston-
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
Jefferson
Total
Assets:
                         
Rental property, net
$10,479
$7,060
$63,227
$23,489
$364,329
$43,352
$56,750
--
$17,000
$14,810
--
--
$600,496
Other assets
2,689
720
18,037
3,709
44,790
24,572
1,547
$10,389
896
812
$86,627
$3,168
197,956
Total assets
$13,168
$7,780
$81,264
$27,198
$409,119
$67,924
$58,297
$10,389
$17,896
$15,622
$86,627
$3,168
$798,452
Liabilities and
                         
 partners’/members’
                         
 capital (deficit):
                         
Mortgages, loans
                         
  payable and other
                         
  obligations
--
$14,681
$75,632
$19,225
$278,435
$52,800
$42,495
--
--
$8,050
--
--
$ 491,318
Other liabilities
$    532
527
4,809
58
22,663
6,982
1,129
$11,769
--
--
$16,633
$1,330
66,432
Partners’/members’
 
 
                     
  capital (deficit)
12,636
(7,428)
823
7,915
108,021
8,142
14,673
(1,380)
$17,896
7,572
69,994
1,838
240,702
Total liabilities and
                         
  partners’/members’
                         
  capital (deficit)
$13,168
$7,780
$81,264
$27,198
$409,119
$67,924
$58,297
$10,389
$17,896
$15,622
$86,627
$3,168
$798,452
Company’s
                         
  investment
                         
  in unconsolidated
                         
  joint ventures, net
$6,240
--
$    356
$3,670
$123,084
$1,950
$4,608
--
$9,068
$7,977
$22,144
$    734
$179,831



 
December 31, 2007
 
 
Plaza
   
Red Bank
Mack-
Princeton
             
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Boston-
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
Jefferson
Total
Assets:
                   
 
   
Rental property, net
$10,787
$7,254
$65,611
$23,618
$368,028
$42,517
$57,368
--
$17,000
$7,954
--
--
$600,137
Other assets
2,250
763
17,995
2,818
52,741
25,679
3,323
$9,622
--
851
$81,651
$1,918
199,611
Total assets
$13,037
$8,017
$83,606
$26,436
$420,769
$68,196
$60,691
$9,622
$17,000
$8,805
$81,651
$1,918
$799,748
Liabilities and
                         
 partners’/members’
                         
 capital (deficit):
                         
Mortgages, loans
                         
  payable and other
                         
  obligations
--
$14,771
$76,072
$18,116
$281,746
$52,800
$42,495
--
--
$8,761
--
--
$ 494,761
Other liabilities
$    532
366
6,324
132
23,809
6,847
1,809
$10,133
--
--
$20,678
$     80
70,710
Partners’/members’
                 
 
   
 
  capital (deficit)
12,505
(7,120)
1,210
8,188
115,214
8,549
16,387
(511)
$17,000
44
60,973
1,838
234,277
Total liabilities and
                         
  partners’/members’
                         
  capital (deficit)
$13,037
$8,017
$83,606
$26,436
$420,769
$68,196
$60,691
$9,622
$17,000
$8,805
$81,651
$1,918
$799,748
Company’s
                         
  investment
                         
  in unconsolidated
                         
  joint ventures, net
$6,175
--
$    513
$3,703
$128,107
$2,029
$4,729
--
$8,518
$7,752
$18,828
$    712
$181,066



 
20

 


SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended June 30, 2008 and 2007:  (dollars in thousands)

 
Three Months Ended June 30, 2008
 
 
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Jefferson
Total
Total revenues
$    233
$    456
$12,474
$    821
$12,504
$3,355
$    657
$    410
--
$    595
$      4
--
--
$31,509
Operating and
                           
  other expenses
(49)
(283)
(6,825)
(214)
(5,120)
(1,509)
(799)
(132)
--
(19)
--
--
--
(14,950)
Depreciation and
                           
  amortization
(154)
(63)
(1,459)
(148)
(4,703)
(988)
(398)
(81)
--
(127)
--
--
--
(8,121)
Interest expense
--
(210)
(1,178)
(191)
(4,274)
(831)
(607)
(182)
--
(144)
--
--
--
(7,617)
                             
Net income
$     30
$(100)
$3,012
$    268
$(1,593)
$     27
$(1,147)
$     15
--
$    305
$      4
--
--
$    821
Company’s equity
                           
  in earnings (loss)
                           
  of unconsolidated
                           
  joint ventures
$     15
--
$1,556
$    134
$(1,040)
$     28
$(325)
$    363
--
$    152
$      1
--
--
$    884



 
Three Months Ended June 30, 2007
 
 
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Jefferson
Total
Total revenues
$    215
$    518
$11,366
--
$17,251
$2,386
$    738
$      2
--
$    524
$    205
$8,708
--
$41,913
Operating and
                           
  other expenses
(44)
(389)
(6,943)
--
(7,716)
(1,516)
(977)
(31)
--
(14)
(400)
(8,647)
--
(26,677)
Depreciation and
                           
  amortization
(154)
(175)
(1,488)
--
(7,429)
(786)
(467)
(183)
--
(88)
--
--
--
(10,770)
Interest expense
--
(265)
(1,199)
--
(6,805)
(1,223)
(846)
(321)
--
(169)
--
--
--
(10,828)
                             
Net income
$     17
$(311)
$1,736
--
$(4,699)
$(1,139)
$(1,552)
$(533)
--
$    253
$(195)
$     61
--
$(6,362)
Company’s equity
                           
  in earnings (loss)
                           
  of unconsolidated
$      8
$(175)
$    762
--
$(1,604)
$(270)
$(466)
$   (44)
--
$    127
$   (58)
$     24
--
$(1,696)


 
21

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the six months ended June 30, 2008 and 2007:  (dollars in thousands)

 
Six Months Ended June 30, 2008
 
 
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Jefferson
Total
Total revenues
$    536
$    944
$21,347
$1,603
$24,829
$6,143
$1,327
$    805
--
$    992
$     50
--
--
$58,576
Operating and
                           
  other expenses
(97)
(597)
(12,444)
(386)
(10,273)
(2,992)
(1,699)
(242)
--
(42)
--
--
--
(28,772)
Depreciation and
                           
  amortization
(308)
(244)
(2,928)
(296)
(9,454)
(1,754)
(791)
(167)
--
(255)
--
--
--
(16,197)
Interest expense
--
(411)
(2,361)
(415)
(8,935)
(1,804)
(1,351)
(334)
--
(244)
--
--
--
(15,855)
                             
Net income
$    131
$(308)
$3,614
$    506
$(3,833)
$(407)
$(2,514)
$     62
--
$    451
$     50
--
--
$(2,248)
Company’s equity
                           
  in earnings (loss)
                           
  of unconsolidated
                           
  joint ventures
$     65
--
$1,841
$    252
$(2,612)
$   (79)
$(363)
$    389
--
$    225
$     18
--
--
$(264)



 
Six Months Ended June 30, 2007
 
 
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Jefferson
Total
Total revenues
$    474
$1,045
$20,304
--
$33,692
$5,252
$1,063
$      2
--
$1,048
$    531
$17,698
--
$81,109
Operating and
                           
  other expenses
(83)
(763)
(12,506)
--
(15,158)
(2,991)
(1,864)
(40)
--
(33)
(661)
(17,565)
--
(51,664)
Depreciation and
                           
  amortization
(308)
(351)
(2,966)
--
(14,164)
(1,536)
(2,027)
(183)
--
(176)
--
--
--
(21,711)
Interest expense
--
(529)
(2,402)
--
(13,429)
(2,331)
(1,643)
(414)
--
(344)
--
--
--
(21,092)
                             
Net income
$     83
$(598)
$2,430
--
$(9,059)
$(1,606)
$(4,471)
$(635)
--
$    495
$(130)
$    133
--
$(13,358)
Company’s equity
                           
  in earnings (loss)
                           
  of unconsolidated
$     41
$(175)
$1,109
--
$(3,339)
$(402)
$(1,370)
$   (52)
--
$    247
$   (39)
$     53
--
$(3,927)






 
22

 

4.  
DEFERRED CHARGES AND OTHER ASSETS

 
June 30,
December 31,
(dollars in thousands)
2008
2007
Deferred leasing costs
$204,695
$202,282
Deferred financing costs
22,772
22,922
 
227,467
225,204
Accumulated amortization
(92,320)
(90,482)
Deferred charges, net
135,147
134,722
Notes receivable
11,526
11,610
In-place lease values, related intangible and other assets, net
50,170
64,212
Prepaid expenses and other assets, net
30,499
35,842
     
Total deferred charges and other assets, net
$227,342
$246,386


5.  
DISCONTINUED OPERATIONS

There were no discontinued operations during the three and six month periods ended June 30, 2008.

As the Company sold 1000 Bridgeport in Shelton, Connecticut; 500 West Putnam in Greenwich, Connecticut; and 100 & 200 Decadon in Egg Harbor, New Jersey during the year ended December 31, 2007, the Company has presented these assets as discontinued operations in its statements of operations for the periods presented.

The following tables summarize income from discontinued operations (net of minority interest) for the three and six month periods ended June 30, 2007: (dollars in thousands)

 
Three Months Ended
Six Months Ended
 
June 30, 2007
June 30, 2007
Total revenues
$ 1,608
$ 3,819
Operating and other expenses
(661)
(1,577)
Depreciation and amortization
(18)
(424)
Interest expense (net of interest income)
(197)
(545)
Minority interest
(134)
(236)
     
Income from discontinued operations
   
(net of minority interest)
$    598
$ 1,037



 
Three Months Ended
Six Months Ended
 
June 30, 2007
June 30, 2007
Realized gains on disposition of rental property
$ 38,860
$ 38,860
Minority interest
(7,113)
(7,113)
     
Realized gains (losses) and unrealized losses
   
on disposition of rental property
   
(net of minority interest)
$ 31,747
$ 31,747





 
23

 

6.  
SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of June 30, 2008 and December 31, 2007 is as follows (dollars in thousands):

 
June 30,
December 31,
Effective
 
2008
2007
Rate (1)
7.250% Senior Unsecured Notes, due March 15, 2009
$   299,834
$   299,716
7.49%
5.050% Senior Unsecured Notes, due April 15, 2010
149,902
149,874
5.27%
7.835% Senior Unsecured Notes, due December 15, 2010
15,000
15,000
7.95%
7.750% Senior Unsecured Notes, due February 15, 2011
299,554
299,468
7.93%
5.250% Senior Unsecured Notes, due January 15, 2012
99,307
99,210
5.46%
6.150% Senior Unsecured Notes, due December 15, 2012
92,718
92,472
6.89%
5.820% Senior Unsecured Notes, due March 15, 2013
25,585
25,530
6.45%
4.600% Senior Unsecured Notes, due June 15, 2013
99,858
99,844
4.74%
5.125% Senior Unsecured Notes, due February 15, 2014
201,348
201,468
5.11%
5.125% Senior Unsecured Notes, due January 15, 2015
149,395
149,349
5.30%
5.800% Senior Unsecured Notes, due January 15, 2016
200,578
200,616
5.81%
       
Total Senior Unsecured Notes
$1,633,079
$1,632,547
6.33%
       
(1)Includes the cost of terminated treasury lock agreements (if any), offering and other transaction costs and the discount on the notes, as applicable.


7.  
UNSECURED REVOLVING CREDIT FACILITY

On June 22, 2007, the Company extended and modified its unsecured credit facility with a group of 23 Lenders.  Amongst other modifications, the facility was extended for an additional two years and matures in June 2011, with an extension option of one year, which would require a payment of 15 basis points of the then borrowing capacity of the facility upon exercise.  In addition, the interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) was reduced by 10 basis points to LIBOR plus 55 basis points at the BBB/Baa2 pricing level.  On September 21, 2007, the Company exercised an option to expand the borrowing capacity under its unsecured credit facility from $600 million to $775 million (further expandable to $800 million).

The facility has a competitive bid feature, which allows the Company to solicit bids from lenders under the facility to borrow up to $300 million at interest rates less than the current LIBOR plus 55 basis point spread.  The Company may also elect an interest rate representing the higher of the lender’s prime rate or the Federal Funds rate plus 50 basis points.  The unsecured facility also requires a 15 basis point facility fee on the current borrowing capacity payable quarterly in arrears.

The interest rate and the facility fee are subject to adjustment, on a sliding scale, based upon the Operating Partnership’s unsecured debt ratings.  In the event of a change in the Operating Partnership’s unsecured debt rating, the interest and facility fee rates will be adjusted in accordance with the following table:

Operating Partnership’s
Interest Rate –
 
Unsecured Debt Ratings:
Applicable Basis Points
Facility Fee
S&P Moody’s/Fitch (a)
Above LIBOR
Basis Points
No ratings or less than BBB-/Baa3/BBB-
100.0
25.0
BBB-/Baa3/BBB-
75.0
20.0
BBB/Baa2/BBB (current)
55.0
15.0
BBB+/Baa1/BBB+
42.5
15.0
A-/A3/A- or higher
37.5
12.5
     
(a) If the Operating Partnership has debt ratings from two rating agencies, one of which is Standard & Poor’s Rating Services (“S&P”) or Moody’s Investors Service (“Moody’s”), the rates per the above table shall be based on the lower of such ratings.  If the Operating Partnership has debt ratings from three rating agencies, one of which is S&P or Moody’s, the rates per the above table shall be based on the lower of the two highest ratings.  If the Operating Partnership has debt ratings from only one agency, it will be considered to have no rating or less than BBB-/Baa3/BBB- per the above table.
 
 
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The terms of the unsecured facility include certain restrictions and covenants which limit, among other things, the payment of dividends (as discussed below), the incurrence of additional indebtedness, the incurrence of liens and the disposition of real estate properties (to the extent that: (i) such property dispositions cause the Company to default on any of the financial ratios of the facility described below, or (ii) the property dispositions are completed while the Company is under an event of default under the facility, unless, under certain circumstances, such disposition is being carried out to cure such default), and which require compliance with financial ratios relating to the maximum leverage ratio, the maximum amount of secured indebtedness, the minimum amount of tangible net worth, the minimum amount of fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property interest coverage and certain investment limitations.  The dividend restriction referred to above provides that, if an event of default has occurred and is continuing, the Company will not make any excess distributions with respect to common stock or other common equity interests except to enable the Company to continue to qualify as a REIT under the Code.

The lending group for the credit facility consists of: JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”); Bank of America, N.A., as syndication agent; Scotiabanc, Inc., Wachovia Bank, National Association; and Wells Fargo Bank, National Association, as documentation agents; SunTrust Bank, as senior managing agent; US Bank National Association, Citicorp North America, Inc.; and PNC Bank National Association, as managing agents; and Bank of China, New York Branch; The Bank of New York; Chevy Chase Bank, F.S.B.; The Royal Bank of Scotland PLC; Mizuho Corporate Bank, Ltd.; The Bank of Tokyo-Mitsubishi UFJ, Ltd. (Successor by merger to UFJ Bank Limited); North Fork Bank; Bank Hapoalim B.M.; Comerica Bank; Chang Hwa Commercial Bank, Ltd., New York Branch; First Commercial Bank, New York Agency; Mega International Commercial Bank Co. Ltd., New York Branch; Deutsche Bank Trust Company Americas and Hua Nan Commercial Bank, New York Agency, as participants.

As of June 30, 2008 and December 31, 2007, the Company had outstanding borrowings of $293 million and $250 million, respectively, under its unsecured revolving credit facility.

MONEY MARKET LOAN
The Company has an agreement with JP Morgan Chase Bank to participate in a money market loan program (“Money Market Loan”).  The Money Market Loan is an unsecured borrowing of up to $75 million arranged by JPMorgan Chase Bank with maturities of 30 days or less.  The rate of interest on the Money Market Loan borrowing is set at the time of each borrowing.  As of June 30, 2008 and December 31, 2007, the Company had no outstanding borrowings under the Money Market Loan.


8.  
MORTGAGES, LOANS PAYABLE AND OTHER OBLIGATIONS

The Company has mortgages, loans payable and other obligations which primarily consist of various loans collateralized by certain of the Company’s rental properties.  As of June 30, 2008, 16 of the Company’s properties with a total book value of approximately $503 million are encumbered by the Company’s mortgages and loans payable.  Payments on mortgages, loans payable and other obligations are generally due in monthly installments of principal and interest, or interest only.




 
25

 

A summary of the Company’s mortgages, loans payable and other obligations as of June 30, 2008 and December 31, 2007 is as follows (dollars in thousands):

   
Effective
Principal Balance at
 
   
Interest
June 30,
December 31,
 
Property Name
Lender
Rate (a)
2008
2007
Maturity
6404 Ivy Lane
TIAA
5.58%
--
$ 13,029
               (b)
Assumed obligations
Various
4.92%
$ 20,880
27,657
05/01/09 (c)
Various (d)
Prudential Insurance
4.84%
150,000
150,000
01/15/10     
105 Challenger Road
Archon Financial CMBS
6.24%
19,078
18,968
06/06/10     
2200 Renaissance Boulevard
Wachovia CMBS
5.89%
17,245
17,442
12/01/12     
Soundview Plaza
Morgan Stanley Mortgage Capital
6.02%
17,345
17,575
01/01/13     
9200 Edmonston Road
Principal Commercial Funding L.L.C.
5.53%
5,026
5,096
05/01/13     
6305 Ivy Lane
John Hancock Life Insurance Co.
5.53%
7,001
7,098
01/01/14     
395 West Passaic
State Farm Life Insurance Co.
6.00%
12,389
12,596
05/01/14     
6301 Ivy Lane
John Hancock Life Insurance Co.
5.52%
6,569
6,655
07/01/14     
35 Waterview Boulevard
Wachovia CMBS
6.35%
19,988
20,104
08/11/14     
23 Main Street
JPMorgan CMBS
5.59%
32,747
32,968
09/01/18     
           
Total mortgages, loans payable and other obligations
 
$308,268
$329,188
 

(a) Reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs and other transaction costs, as applicable.
(b) On May 5, 2008, the Company repaid this mortgage loan at par, using available cash.
(c) The obligations mature at various times through May 2009.
(d) Mortgage is collateralized by seven properties.

CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the six months ended June 30, 2008 and 2007 was $65,001,000 and $63,877,000, respectively.  Interest capitalized by the Company for the six months ended June 30, 2008 and 2007 was $2,977,000 and $2,510,000, respectively.

SUMMARY OF INDEBTEDNESS
As of June 30, 2008, the Company’s total indebtedness of $2,234,347,000 (weighted average interest rate of 5.74 percent) was comprised of $293,000,000 of revolving credit facility borrowings (weighted average rate of 3.00 percent) and fixed rate debt and other obligations of $1,941,347,000 (weighted average rate of 6.16 percent).

As of December 31, 2007, the Company’s total indebtedness of $2,211,735,000 (weighted average interest rate of 6.08 percent) was comprised of $250,000,000 of revolving credit facility borrowings (weighted average rate of 5.55 percent) and fixed rate debt of $1,961,735,000 (weighted average rate of 6.15 percent).


9.  
MINORITY INTERESTS

OPERATING PARTNERSHIP
Minority interests in the accompanying consolidated financial statements relate to (i) preferred units (“Preferred Units”) and common units in the Operating Partnership, held by parties other than the Company, and (ii) interests in consolidated joint ventures for the portion of such properties not owned by the Company.

Preferred Units
In connection with the Company’s issuance of $25 million of Series C cumulative redeemable perpetual preferred stock, the Company acquired from the Operating Partnership $25 million of Series C Preferred Units (the “Series C Preferred Units”), which have terms essentially identical to the Series C preferred stock.  See Note 13:  Stockholders’ Equity – Preferred Stock.


 
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Common Units
Certain individuals and entities own common units in the Operating Partnership.  A common unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership.  Common units are redeemable by the common unitholders at their option, subject to certain restrictions, on the basis of one common unit for either one share of common stock or cash equal to the fair market value of a share at the time of the redemption.  The Company has the option to deliver shares of common stock in exchange for all or any portion of the cash requested.  The common unitholders may not put the units for cash to the Company or the Operating Partnership.  When a unitholder redeems a common unit, minority interest in the Operating Partnership is reduced and the Company’s investment in the Operating Partnership is increased.

Unit Transactions
The following table sets forth the changes in minority interest which relate to the common units in the Operating Partnership for the six months ended June 30, 2008 (dollars in thousands):

     
Common
Common
     
Units
Unitholders
Balance at January 1, 2008
   
14,985,538
$456,436
Net income
   
--
7,620
Distributions
   
--
(19,144)
Redemption of common units for shares
       
of Common Stock
   
(54,400)
(1,645)
         
Balance at June 30, 2008
   
14,931,138
$443,267

Minority Interest Ownership
As of June 30, 2008 and December 31, 2007, the minority interest common unitholders owned 18.5 percent of the Operating Partnership.

Consolidated Joint Ventures
The Company has ownership interests in certain joint ventures which it consolidates.  Various entities and/or individuals hold minority interests in these ventures.


10.  
EMPLOYEE BENEFIT 401(k) PLANS

Employees of the Company, other than those assigned to the Gale Company and affiliated employers, who have attained age 21 and completed one-half year of service with the Company are eligible to participate in the Mack-Cali Realty Corporation 401(k) Savings/Retirement Plan (the “401(k) Plan”). Eligible employees may elect to defer from 1 percent up to 30 percent of their annual compensation on a pre-tax basis to the 401(k) Plan, subject to certain limitations imposed by federal law. The amounts contributed by employees are immediately vested and non-forfeitable. The Company may make discretionary matching or profit sharing contributions to the 401(k) Plan on behalf of eligible participants in any plan year. Participants are always 100 percent vested in their pre-tax contributions and will begin vesting in any matching or profit sharing contributions made on their behalf after two years of service with the Company at a rate of 20 percent per year, becoming 100 percent vested after a total of six years of service with the Company. The assets of the 401(k) Plan are held in trust and a separate account is established for each participant. A participant may receive a distribution of his or her vested account balance in the 401(k) Plan in a single sum or installment payment or in the form of an annuity upon his or her termination of service with the Company.  Total expense recognized by the Company for the 401(k) Plan for the three months ended June 30, 2008 and 2007 was $100,000 and $100,000, respectively, and for the six months ended June 30, 2008 and 2007 was $200,000 and $200,000, respectively.

All employees of the Gale Company and other affiliated participating employers, other than certain employees who are represented for collective bargaining purposes by a labor organization, who have attained age 201/2 and completed one-half year of service with a participating employer are eligible to participate in the Gale Company Employee Savings Plan (the “Gale Plan”). The Gale Plan permits eligible employees to defer their annual compensation on a pre-tax basis, subject to certain limitations imposed by federal law. The amounts contributed by employees are immediately vested and non-forfeitable.  The Gale Company or the participant’s employer may match the employee’s deferral at the rate of 50 percent of the first six percent of the employee’s annual compensation for employees who have at least 1,000 hours of service and are employed on the last day of the plan year. In addition, the Company, at management's discretion, may make discretionary contributions. Participants become 50 percent vested in employer contributions after two years of service and become 100 percent vested after three years.  The assets of the Gale Plan are held in trust and a separate account is established for each participant.  A participant may receive a distribution of his or her vested account balance in the Gale Plan in a single sum or installment payment or in the form of an annuity upon his or her termination of service with the Company.  Effective April 1, 2007, the Gale Plan was merged into the 401(k) Plan.  In accordance with the Gale/Green transactions, the Company continued to make matching contributions to former Gale Plan participants under the Gale Plan matching contribution formula through the payroll period ending May 4, 2007.  Moreover, federal law requires the Company to preserve (i) the Gale Plan vesting schedule for certain Gale Plan participants with three or more years of service as of May 4, 2007 and (ii) certain benefits previously offered under the Gale Plan.  Total expense recognized by the Company for the Gale Plan for the three and six months ended June 30, 2007 was $31,000 and $111,000, respectively.
 
 
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11.  
COMMITMENTS AND CONTINGENCIES

TAX ABATEMENT AGREEMENTS
Pursuant to agreements with the City of Jersey City, New Jersey, the Company is required to make payments in lieu of property taxes (“PILOT”) on certain of its properties located in Jersey City, as follows:

The Harborside Plaza 5 agreement, as amended, which commenced in 2002 upon substantial completion of the property, as defined, is for a term of 20 years.  The PILOT is equal to two percent of Total Project Costs.  Total Project Costs, as defined, are $159.6 million.  The PILOT totaled $798,000 and $798,000 for the three months ended June 30, 2008 and 2007, respectively, and $1.6 million and $1.6 million for the six months ended June 30, 2008 and 2007, respectively.

The Harborside Plaza 4-A agreement, which commenced in 2000, is for a term of 20 years.  The PILOT is equal to two percent of Total Project costs, as defined, and increases by 10 percent in years 7, 10 and 13 and by 50 percent in year 16.  Total Project costs, as defined, are $45.5 million.  The PILOT totaled $250,000 and $250,000 for the three months ended June 30, 2008 and 2007, respectively, and $500,000 and $500,000 for the six months ended June 30, 2008 and 2007, respectively.

Total Project Costs for Harborside Plaza 5 and Harborside Plaza 4-A are currently being reviewed by the City of Jersey City.  The Company believes that the ultimate resolution of such reviews will not have a material adverse effect on the Company’s financial condition.

At the conclusion of the above-referenced PILOT agreements, it is expected that the properties will be assessed by the municipality and be subject to real estate taxes at the then prevailing rates.

LITIGATION
The Company is a defendant in litigation arising in the normal course of its business activities.  Management does not believe that the ultimate resolution of these matters will have a materially adverse effect upon the Company’s financial condition taken as whole.


 
28

 

GROUND LEASE AGREEMENTS
Future minimum rental payments under the terms of all non-cancelable ground leases under which the Company is the lessee, as of June 30, 2008, are as follows (dollars in thousands):

Year
Amount
2008
$      255
2009
517
2010
501
2011
501
2012
501
2013 through 2084
34,952
   
Total
$37,227

Ground lease expense incurred by the Company during the three months ended June 30, 2008 and 2007 amounted to $184,000 and $172,000, respectively, and was $350,000 and $331,000 for the six months ended June 30, 2008 and 2007, respectively.

OTHER
The Company may not dispose of or distribute certain of its properties, currently comprising 11 properties with an aggregate net book value of approximately $205.5 million, which were originally contributed by certain unrelated common unitholders, without the express written consent of such common unitholders, as applicable, except in a manner which does not result in recognition of any built-in-gain (which may result in an income tax liability) or which reimburses the appropriate specific common unitholders for the tax consequences of the recognition of such built-in-gains (collectively, the “Property Lock-Ups”).  The aforementioned restrictions do not apply in the event that the Company sells all of its properties or in connection with a sale transaction which the Company’s Board of Directors determines is reasonably necessary to satisfy a material monetary default on any unsecured debt, judgment or liability of the Company or to cure any material monetary default on any mortgage secured by a property.  The Property Lock-Ups expire periodically through 2016.  Upon the expiration of the Property Lock-Ups, the Company is generally required to use commercially reasonable efforts to prevent any sale, transfer or other disposition of the subject properties from resulting in the recognition of built-in gain to the specific common unitholders, which include members of the Mack Group (which includes William L. Mack, Chairman of the Company’s Board of Directors; David S. Mack, director; Earle I. Mack, a former director; and Mitchell E. Hersh, president, chief executive officer and director), the Robert Martin Group (which includes Robert F. Weinberg, director; Martin S. Berger, a former director; and Timothy M. Jones, former president), the Cali Group (which includes John R. Cali, director, and John J. Cali, a former director).  126 of the Company’s properties, with an aggregate net book value of approximately $1.9 billion, have lapsed restrictions and are subject to these conditions.


12.  
TENANT LEASES

The Properties are leased to tenants under operating leases with various expiration dates through 2026.  Substantially all of the leases provide for annual base rents plus recoveries and escalation charges based upon the tenant’s proportionate share of and/or increases in real estate taxes and certain operating costs, as defined, and the pass-through of charges for electrical usage.


 
29

 

Future minimum rentals to be received under non-cancelable operating leases at June 30, 2008 are as follows (dollars in thousands):

Year
Amount
2008
$   287,643
2009
567,477
2010
510,924
2011
447,739
2012
380,866
2013 and thereafter
1,203,196
   
Total
$3,397,845


13.  
STOCKHOLDERS’ EQUITY

To maintain its qualification as a REIT, not more than 50 percent in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any taxable year of the Company, other than its initial taxable year (defined to include certain entities), applying certain constructive ownership rules.  To help ensure that the Company will not fail this test, the Company’s Articles of Incorporation provide for, among other things, certain restrictions on the transfer of common stock to prevent further concentration of stock ownership.  Moreover, to evidence compliance with these requirements, the Company must maintain records that disclose the actual ownership of its outstanding common stock and demands written statements each year from the holders of record of designated percentages of its common stock requesting the disclosure of the beneficial owners of such common stock.

PREFERRED STOCK
The Company has 10,000 shares of eight-percent Series C cumulative redeemable perpetual preferred stock issued and outstanding (“Series C Preferred Stock”) in the form of 1,000,000 depositary shares ($25 stated value per depositary share).  Each depositary share represents 1/100th of a share of Series C Preferred Stock.

The Series C Preferred Stock has preference rights with respect to liquidation and distributions over the common stock.  Holders of the Series C Preferred Stock, except under certain limited conditions, will not be entitled to vote on any matters.  In the event of a cumulative arrearage equal to six quarterly dividends, holders of the Series C Preferred Stock will have the right to elect two additional members to serve on the Company’s Board of Directors until dividends have been paid in full.  At June 30, 2008, there were no dividends in arrears.  The Company may issue unlimited additional preferred stock ranking on a parity with the Series C Preferred Stock but may not issue any preferred stock senior to the Series C Preferred Stock without the consent of two-thirds of its holders.  The Series C Preferred Stock is essentially on an equivalent basis in priority with the Preferred Units.

The Series C Preferred Stock is redeemable at the option of the Company, in whole or in part, at $25 per depositary share, plus accrued and unpaid dividends.

SHARE REPURCHASE PROGRAM
On September 12, 2007, the Board of Directors authorized an increase to the Company’s repurchase program under which the Company was permitted to purchase up to $150 million of the Company’s outstanding common stock (“Repurchase Program”).  The Company has purchased and retired 2,893,630 shares of its outstanding common stock for an aggregate cost of approximately $104 million through June 30, 2008 under the Repurchase Program.  The Company has a remaining authorization to repurchase up to an additional $46 million of its outstanding common stock, which it may repurchase from time to time in open market transactions at prevailing prices or through privately negotiated transactions.

STOCK OPTION PLANS
In May 2004, the Company established the 2004 Incentive Stock Plan under which a total of 2,500,000 shares have been reserved for issuance.  No options have been granted through June 30, 2008 under this plan.  In September 2000, the Company established the 2000 Employee Stock Option Plan (“2000 Employee Plan”) and the Amended and Restated 2000 Director Stock Option Plan (“2000 Director Plan”).  In May 2002, shareholders of the Company approved amendments to both plans to increase the total shares reserved for issuance under both of the 2000 plans from 2,700,000 to 4,350,000 shares of the Company’s common stock (from 2,500,000 to 4,000,000 shares under the 2000 Employee Plan and from 200,000 to 350,000 shares under the 2000 Director Plan).  In 1994, and as subsequently amended, the Company established the Mack-Cali Employee Stock Option Plan (“Employee Plan”) and the Mack-Cali Director Stock Option Plan (“Director Plan”) under which a total of 5,380,188 shares (subject to adjustment) of the Company’s common stock had been reserved for issuance (4,980,188 shares under the Employee Plan and 400,000 shares under the Director Plan).  As the Employee Plan and Director Plan expired in 2004, stock options may no longer be issued under those plans.  Stock options granted under the Employee Plan in 1994 and 1995 became exercisable over a three-year period.  Stock options granted under the 2000 Employee Plan and those options granted subsequent to 1995 under the Employee Plan become exercisable over a five-year period.  All stock options granted under both the 2000 Director Plan and Director Plan become exercisable in one year.  All options were granted at the fair market value at the dates of grant and have terms of ten years.  As of June 30, 2008 and December 31, 2007, the stock options outstanding had a weighted average remaining contractual life of approximately 3.8 and 4.1 years, respectively.  Stock options exercisable at June 30, 2008 and December 31, 2007 had a weighted average remaining contractual life of approximately 3.7 and 4.0 years, respectively.
 
 
30

 

 
Information regarding the Company’s stock option plans for the six months ended June 30, 2008 is summarized below:

 
Shares
Weighted
 
 
Under
Average
Aggregate Intrinsic
 
Options
Exercise Price
Value $(000’s)
Outstanding at January 1, 2008
497,731
$29.03
 
Exercised
(38,837)
$28.35
 
Lapsed or canceled
(19,795)
$37.31
 
Outstanding at June 30, 2008 ($24.63 – $45.47)
439,099
$28.72
$2,393
Options exercisable at June 30, 2008
439,099
$28.72
$2,393
Available for grant at June 30, 2008
4,537,574
   

Cash received from options exe