msw10k_2009.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended: December 31, 2009

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______________ to______________

Commission File No. 1-8383

MISSION WEST PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

Maryland	95-2635431
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10050 Bandley Drive, Cupertino, CA	95014
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 725-0700

_______________

Securities Registered Pursuant to Section 12(b) of the Act:


Title of each class	Name of each exchange on which registered
Common Stock, $.001 par value per share	The Nasdaq Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

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 June 30, 2009, the aggregate market value of the Registrant’s common stock held by non-affiliates of the registrant was $132,479,536 based on the closing price as reported on the NASDAQ Stock Market LLC.

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

Class		Outstanding at February 28, 2010
Common Stock, $.001 par value per share		21,877,211 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement in connection with the Registrant’s 2010 Annual Meeting of Stockholders to be held May 20, 2010 are incorporated by reference into Part III of this Form 10-K. The Registrant intends to file its proxy statement within 120 days after its fiscal year end.

FORWARD LOOKING INFORMATION

This annual report contains forward-looking statements within the meaning of the federal securities laws. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with these safe harbor provisions. Forward-looking statements include our discussion of “Quantitative and Qualitative Disclosures about Market Risks” in Item 7A below.Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of us, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “esti mate,” “project” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects or would cause actual results in the future to differ materially from any of our forward-looking statements of the Company include, but are not limited to, changes in: the credit markets and the overall availability and cost of credit, economic conditions generally and the real estate market specifically, legislative or regulatory provisions affecting the Company (including changes to laws governing the taxation of Real Estate Investment Trusts (“REITs”)), availability of capital, interest rates, competition, supply of and demand for office and industrial properties in our current and proposed market areas, tenant defaults and bankruptcies, and general accounting principles, policies and guidelines applicable to REITs. In addition, th e actual timing of development, construction, and leasing on the projects that the Company believes it may acquire in the future is unknown presently. These risks and uncertainties, together with the other risks described from time to time in our reports and documents filed with the Securities and Exchange Commission, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements (see Item 1A, “Risk Factors”).

MISSION WEST PROPERTIES, INC.

2009 FORM 10-K ANNUAL REPORT

Table of Contents

	PART I	Page No.
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	14
Item 2.	Properties	15
Item 3.	Legal Proceedings	20
Item 4.	Reserved	20
	PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	80
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	81
Item 11.	Executive Compensation	81
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	81
Item 13.	Certain Relationships and Related Transactions, and Director Independence	81
Item 14.	Principal Accountant Fees and Services	81
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	82
	Signatures	83
	Rule 13a-14(a) Certifications
	Section 1350 Certifications

PART I

Item 1. Business

Organization and General Business Description

Mission West Properties, Inc. (the “Company”) acquires, markets, leases, and manages research and development (“R&D”) properties, primarily located in the Silicon Valley portion of the San Francisco Bay Area. As of December 31, 2009, we owned and managed 111 properties totaling approximately 8.0 million rentable square feet of R&D properties through four limited partnerships, or operating partnerships, for which we are the sole general partner. R&D property is designed for research and development and office uses and, in some cases, includes space for light manufacturing operations with loading docks. We believe that we have one of the largest portfolios of R&D properties in the Silicon Valley. There are two tenants who individually lease in excess of 300,000 rentable square feet from us: Micro soft Corporation and Apple Computer, Inc. For federal income tax purposes we have operated as a self-managed, self-administered and fully integrated Real Estate Investment Trust (“REIT”) since fiscal 1999.

Prior to July 1, 1998, most of our properties were under the ownership or control of Carl E. Berg, his brother Clyde J. Berg, certain members of their respective immediate families, and certain entities in which Carl E. Berg and/or Clyde J. Berg held controlling or other ownership interests, including Berg & Berg Developers, Berg & Berg Enterprises, Inc. and Berg & Berg Enterprises, LLC (the “Berg Group”). We acquired these properties as of July 1, 1998 by becoming the general partner of each of the four operating partnerships in an UPREIT transaction. At that time, we also acquired ten properties comprising approximately 560,000 rentable square feet from entities controlled by third parties in which the Berg Group members were significant owners.

Through various property acquisition agreements with the Berg Group and subject to the approval of the Independent Directors Committee of the Board of Directors, we have the right to purchase, on pre-negotiated terms, R&D and other types of office and light industrial properties that the Berg Group develops in the future. With in-house development, architectural and construction personnel, the Berg Group continues to focus on a full range of land acquisition, development and construction activities for R&D properties, often build-to-suit, to meet the demands of Silicon Valley information technology companies. As the developer, the Berg Group takes on the risks of purchasing the land, obtaining regulatory approvals and permits and financing construction. Since September 1998, we have acquired approximately 3,386,000 additional rentable square feet of R&D properties from the Berg Group under these agreements.

Our executive offices are located at 10050 Bandley Drive, Cupertino, California 95014, and our telephone number is (408) 725-0700. Our website is located at http://www.missionwest.com. You can access on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). A copy of these filings is available to all interested parties upon written request to “Investor Relations” at our corporate offices.< /font>

We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.W., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC (http://www.sec.gov).

Our Relationship with the Berg Group

Through a series of transactions occurring between May 1997 and December 1998, we became the vehicle for substantially all of the Silicon Valley R&D property operating activities of the Berg Group. We are the general partner pursuant to the partnership agreements of the operating partnerships and, along with members of the Berg Group and other individuals, are party to an acquisition agreement dated as of May 14, 1998 and amended, as of July 1, 1998, exchange rights agreement and the Berg Land Holdings Option Agreement. Each agreement defines the material rights and obligations among us, the Berg Group members, and other parties to those agreements. Among other things, these agreements give us rights to:

·	control the operating partnerships;

·	until December 31, 2010, acquire, subject to approval of the Independent Directors Committee of the Board of Directors, on pre-negotiated terms, all future R&D properties developed by the Berg Group on land currently owned or acquired in the future; and

·	acquire R&D, office and industrial properties identified by the Berg Group in California, Oregon and Washington, subject to approval of the Independent Directors Committee of the Board of Directors.

Under these agreements, our charter and our bylaws, the Berg Group has the right to:

·	designate two of five nominees for director to be elected by our stockholders, subject to the Berg Group’s maintenance of certain ownership interests;

·	participate in our securities offerings;

·	exchange their operating partnership interests (“O.P. Units”) for shares of our common stock;

·	vote on major transactions, subject to maintenance of certain ownership thresholds; and

·	prevent us from selling properties when the sale will have adverse tax consequences to the Berg Group members.

To comply with REIT requirements that restrict the percentage of the total value of our stock that may be owned by five or fewer individuals to 50% or less, our charter generally prohibits the direct or indirect ownership of more than 9% of our common stock by any stockholder. This limit excludes the Berg Group, which has an aggregate ownership limit of 20%. Currently, the Berg Group members collectively own approximately 9.1% of the outstanding shares of our common stock.

Carl E. Berg, the Company’s Chairman of the Board of Directors and Chief Executive Officer and the controlling member of the Berg Group, has been engaged in the development and long-term ownership of Silicon Valley real estate for almost 40 years. In 1969, Mr. Berg foresaw the rising demand for efficient, multi-purpose facilities for the rapidly growing information technology industry in the Silicon Valley. Since 1972, in addition to his real estate activities, Mr. Berg also has been actively involved in venture capital investments in many information technology companies in the Silicon Valley, including such companies as Amdahl Corporation, Sun Microsystems, Inc., and Integrated Device Technologies, Inc. He serves on the board of directors of numerous electronics and energy technology companies. 0;These activities have helped Mr. Berg develop a detailed understanding of the real estate requirements of technology companies, acquire valuable market information and increase his name recognition within the venture capital and entrepreneurial communities. These activities also manifest his commitment to the growth and success of Silicon Valley companies. We believe that Mr. Berg’s substantial knowledge of and contacts in various technology industries provide a significant benefit to the Company.

Acquiring Properties Developed by the Berg Group

We entered into the Berg Land Holdings Option Agreement in December 1998 under which we have an option to purchase all land acquired, directly or indirectly, by Carl E. Berg or Clyde J. Berg that has not been improved with completed buildings and which is zoned, intended or appropriate for R&D, office and/or industrial development or use in the states of California, Oregon and Washington. Currently, the Berg Land Holdings Option Agreement gives us the right to acquire future R&D property developments by the Berg Group on up to 84 additional acres of land currently controlled by the Berg Group, which could support approximately 1.4 million square feet of new development. In light of the continued overcapacity in the Silicon Valley R&D properties marketat this time we do not anticipate a cquiring any additional newly constructed R&D properties from the Berg Group under the Berg Land Holding Option Agreement prior to its expiration at the end of 2010.

As of December 31, 2009, we had acquired 23 leased R&D properties totaling approximately 2,243,000 rentable square feet under the Berg Land Holdings Option Agreement at a cost of approximately $237.8 million, for which we have issued 8,482,085 O.P. Units and assumed debt of approximately $141.4 million. The principal terms of the agreement include the following:

So long as the Berg Group members and their affiliates own or have the right to acquire shares representing at least 65% of our common stock on a Fully Diluted basis, or until December 31, 2010, whichever occurs first, we have the option to acquire any building developed by any member of the Berg Group on the land subject to the Berg Land Holdings Option Agreement at such time as the building has been leased. Upon our exercise of the option, the option price will equal the sum of the following or a lesser amount as approved by the Independent Directors Committee:

1.	the full construction cost of the building; plus

2.	10% of the full construction cost of the building; plus

3.	interest at LIBOR plus 1.65%, on the amount of the full construction cost of the building for the period from the date funds were disbursed by the developer to the close of escrow; plus

4.	the original acquisition cost of the parcel on which the improvements will be constructed, which range from $8.50 to $20.00 per square foot for land currently owned or under option; plus

5.	10% per annum of the amount of the original acquisition cost of the parcel from the later of January 1, 1998 and the seller’s acquisition date, to the close of escrow; minus

6.	the aggregate principal amount of all debt encumbering the acquired property.

·	The acquisition cost, net of any debt, will be payable in cash, or O.P. Units valued at the average closing price of our common stock over the 30-trading-day period preceding the acquisition or, in cash, at the option of the Berg Group.

·	We also must assume all property tax assessments.

·	If we elect not to exercise the option with respect to any property, the Berg Group may hold and lease the property for its own account, or may sell it to a third party.

·	All action taken by us under the Berg Land Holdings Option Agreement, including any variations from stated terms outlined above must be approved by a majority of the members of the Independent Directors Committee.

As a general policy which has been established by the Independent Directors Committee, we do not acquire properties under the Berg Land Holdings Option Agreement until they have been leased. We are responsible for a significant portion of the leasing process in connection with such acquisitions, however.

Recent Rental Market Developments and Their Impact on Our Business

All of our properties are located in the Northern California area known as Silicon Valley, which generally consists of portions of Santa Clara County, Southwestern Alameda County, Southeastern San Mateo County and Eastern Santa Cruz County. In the past several years, the Silicon Valley R&D property market has fluctuated with the local economy. According to a recent report by Cassidy Turley BT Commercial Real Estate (the “CTBT Report”), vacancy rates for Silicon Valley R&D property increased from approximately 16.1% in late 2008 to 19.3% at the end of 2009. Total vacant R&D square footage in Silicon Valley at the end of the fourth quarter of 2009 amounted to approximately 30.2 million rentable square feet, of which 16.3%, or approximately 4.9 million rentable square feet, was sublease spac e. According to the CTBT Report, in 2008 total negative net absorption (which is the computation of gross square footage leased less gross new square footage vacated for the period presented) amounted to approximately 33 thousand rentable square feet, and in 2009 there was total negative net absorption of approximately 5.2 million rentable square feet as local economic conditions deteriorated due to a weakened economy, dysfunctional financial markets, depressed housing, a falling stock market and rising unemployment rates. According to the CTBT Report, the average asking market rent per square foot was $1.03 and $1.26 at year-end 2009 and 2008, respectively, although individual properties within any particular submarket presently may be leased above or below the current average asking market rental rates within that submarket and the region as a whole. Moreover, the impact of vacancies has not been uniform throughout the area. The Silicon Valley R&D property mark et is characterized by a substantial number of submarkets, with rent and vacancy rates varying by submarket and location within each submarket.

In addition, leasing activity for new build-to-suit and vacated R&D properties has slowed considerably during the past several years. The time to complete the marketing and lease up of vacant space has increased from an average of several months to as much as an average of 18 to 40 months as a result of the over-supply of R&D properties in the market.

Despite our strategic focus on single tenant properties and leases, in order to meet market conditions we have been, and expect to continue, leasing less than the entire premises of some of our R&D properties to a single tenant from time to time. Leasing our R&D properties, which generally have been built for single tenant occupancy, to multiple tenants tends to increase our leasing costs and operating expenses and reduce the profitability of our leasing activities. Although we scrutinize each prospective tenant’s creditworthiness and continually evaluate the financial capacity of both our prospective and existing tenants, a downturn in tenants’ businesses may weaken their financial condition and could result in defaults under their lease obligations.

We believe that the average 2010 renewal rental rates for our properties will be approximately equal to, or perhaps, below current market rents. Excluding month-to-month leases comprised of approximately 53,000 rentable square feet, leases representing approximately 217,000 rentable square feet, or 2.6% of our 2010 cash rent, are scheduled to expire during 2010. If we are unable to lease a significant portion of any vacant space or space scheduled to expire; if we experience significant tenant defaults as a result of the current economic downturn; if we restructure existing leases and lower existing rents in order to retain tenants for an extended term; if we increase our lease costs and operating expenses substantially to accommodate multiple tenants in our R&D properties; or if we are not able to lease space at or above current market rates, our results of operations and cash flows will be affected adversely.

Business Strategy

Our acquisition, growth and operating strategy incorporates the following elements:

·	capitalizing on opportunistic acquisitions from third parties of high-quality R&D properties that provide attractive initial yields and significant potential for growth in cash-flow;

·	focusing on general purpose, single-tenant Silicon Valley R&D properties for technology companies in order to maintain low operating costs, reduce tenant turnover and capitalize on our relationships with these companies and our extensive knowledge of their real estate needs; and

·	maintaining prudent financial management principles that emphasize current cash flow while building long-term value, the acquisition of pre-leased properties to reduce development and leasing risks and the maintenance of sufficient liquidity to acquire and finance properties on desirable terms.

Opportunistic Acquisitions

In addition to our potential acquisition opportunities under the Berg Land Holdings Option Agreement, we believe our acquisitions experience, established network of real estate and information technology professionals, and overall financial condition will continue to provide opportunities for external growth. In general, we will seek opportunistic acquisitions of high quality, well located Silicon Valley R&D properties in situations where illiquidity or inadequate management permit their acquisition at favorable prices, and where our management skills and knowledge of Silicon Valley submarkets may facilitate increases in cash flow and asset value. Notwithstanding the forthcoming expiration of the Berg Land Holdings Option Agreement and the present lack of new R&D development opportunities in Silicon Valley, the management and growth of our business remains Carl E. Berg’s primary real estate focus. Moreover, under the Acquisition Agreement, Carl E. Berg has agreed not to directly or indirectly acquire or develop any real property zoned for office, industrial or R&D use in the states of California, Oregon and Washington without first disclosing and making the acquisition opportunity available to us. The Independent Directors Committee decides whether we will pursue each opportunity presented to us by Mr. Berg. This restriction will expire only when there is no Berg Group nominee on our board of directors and the Berg Group’s fully diluted ownership percentage, which is calculated based on all outstanding shares of common stock and all shares of common stock that could be acquired upon the exercise of all outstanding options to acquire our voting stock, as well as all shares of common stock issuable upon exchange of all O.P. Units (“Fully Diluted”), falls below 25%.

We believe that our use of the operating partnership structure allows us to offer prospective sellers the opportunity to contribute properties on a tax-deferred basis in exchange for O.P. Units. Although we have not consummated any transactions on this basis since our July 1, 1998 acquisition of the Berg Group properties, this capacity to complete tax-deferred transactions with sellers of real property further enhances our ability to acquire additional properties.

Focus on Single Tenant Silicon Valley R&D Properties

We intend to continue to emphasize the acquisition of single-tenant rather than multi-tenant properties, a practice that has historically contributed to the relatively low turnover and higher occupancy rates on our properties. We believe that the relatively small number of tenants (71 total) leasing our properties, mostly under the triple net lease structure, allows us to efficiently manage the properties and to serve our tenants’ needs without extensive in-house staff or the assistance of a third-party property management organization. In addition, this emphasis allows us to incur less expense for tenant improvements and leasing commissions than multi-tenant, high turnover property owners. This strategy also reduces the time and expense associated with obtaining building permits and other gover nmental approvals. We believe that the relatively stable, extended relationships that we have developed with our key tenants are valuable in the expansion of our business.

Operations

We operate as a self-administered, self-advised and self-managed REIT with our own employees. As the sole general partner of the operating partnerships, we control the business and assets of the operating partnerships and have full and complete authority, discretion and responsibility with respect to the operating partnerships’ operations and transactions, including, without limitation, acquiring additional properties, borrowing funds, raising new capital, leasing buildings and selecting and supervising all agents of the operating partnerships.

Although most of our leases are triple net and building maintenance and tenant improvements are the responsibility of the tenants, from time to time we may be required to undertake construction and repair work at our properties. We bid all major work competitively to subcontractors. Members of the Berg Group may participate in the competitive bidding for the work, but all contracts with the Berg Group are subject to review and approval by the Independent Directors Committee.

We generally market our properties and negotiate leases ourselves. We make the availability of our properties known to the brokerage community to garner their assistance in locating prospective tenants, however. As a result, we expect to retain our policy of paying fixed commissions to tenants’ brokers.

We believe that our business practices provide us with competitive advantages, including –

External Development Affiliate. Although the Berg Land Holdings Option Agreement expires on December 31, 2010, we anticipate that our relationship with the Berg Group will continue to help us achieve our objectives of long-term sustainable growth as well as maximization of long-term stockholder value. We will still have access to one of the most experienced development teams in the Silicon Valley without the expense of maintaining development personnel. In addition, with the Berg Group’s extensive experience and strong relationship in the Silicon Valley real estate industry, we believe we are well-positioned to take advantage of attractive acquisition and development opportunities. The relationship with the Berg Group helps us maintain and develop long-term relationships with a divers e tenant base and manage operating expenses, capital improvements and tenant improvements through the efficient use of our internal management and leasing function.

Lean Organization, Experienced Team. In part because of our primary focus on Silicon Valley, our experience with the special real estate requirements of information technology tenants and the long-term triple-net structure of our leases, we are able to conduct and expand our business with a small management team comprised of highly qualified and experienced professionals working within a relatively flat organizational structure. We believe that the leanness of our organization and our experience will enable us to rapidly assess and respond to market opportunities and tenant needs, control operating expenses and develop and maintain excellent relationships with tenants. We further believe that these advantages translate into significantly lower costs for operations and give us the ability, along with the Berg Group, to compete favorably with other R&D property developers in Silicon Valley, especially for build-to-suit projects subject to competitive bidding. Furthermore, we believe this lower cost structure allows us to generate better returns from properties whose value can be increased through appropriate remodeling and efficient property management.

Sound Property Management Practices. For each property, the management team, along with the Berg Group staff, develops a specific marketing and property management program. We select vendors and subcontractors on a competitive bid basis from a select group of highly qualified firms with whom we maintain ongoing relationships and carefully supervise their work.

Operating Partnership Agreements

Management

The operating partnerships consist of four separate limited partnerships engaged in the combined operation and ownership of all our properties. The operating partnership agreements are identical in all material respects for all four of the limited partnerships. Pursuant to the operating partnership agreements, we act as the sole general partner of the operating partnerships, in which capacity we have exclusive control of the business and assets of the operating partnerships and generally have full and complete authority, discretion and responsibility with respect to the operating partnerships’ operations and transactions, including, without limitation, acquisitions of additional properties, borrowing funds, raising new capital, leasing buildings, as well as selecting and supervising all employees and agents of the operating par tnerships. Through our authority to manage our business and affairs, our Board of Directors directs the business of the operating partnerships.

Notwithstanding our effective control of the operating partnerships, the Berg Group holds a substantial majority of the outstanding O.P. Units and the consent of the limited partners holding a majority of the outstanding O.P. Units is required with respect to certain extraordinary actions involving the operating partnerships, including:

·	the amendment, modification or termination of the operating partnership agreements;

·	a general assignment for the benefit of creditors or the appointment of a custodian, receiver or trustee for any of the assets of the operating partnerships;

·	the institution of any proceeding for bankruptcy of the operating partnerships;

·	the transfer of any general partner interests in the operating partnerships, including, with certain exceptions, transfers attendant to any merger, consolidation or liquidation of our corporation;

·	the admission of any additional or substitute general partner in the operating partnerships; and

·	a change of control of the operating partnerships.

In addition, until the ownership interest of the Berg Group and its affiliates is less than 15% of the common stock on a Fully Diluted basis, the consent of the limited partners holding a majority of the outstanding O.P. Units is also required with respect to:

·	the liquidation of the operating partnerships;

·	the sale or other transfer of all or substantially all of the assets of the operating partnerships and certain mergers and business combinations resulting in the complete disposition of all O.P. Units; and

·	the issuance of limited partnership interests having seniority as to distributions, assets and voting over the O.P. Units.

Transferability of O.P. Units

The operating partnership agreements provide that the limited partners may transfer their O.P. Units, subject to certain limitations. Except for certain transfers by the limited partners to or from certain of their affiliates, however, all transfers may be made only with our prior written consent as the sole general partner of the operating partnerships.

In addition, no transfer of O.P. Units by the limited partners may be made in violation of certain regulatory and other restrictions set forth in the operating partnership agreements. Except in the case of certain permitted transfers to or from certain affiliates of the limited partners, the exchange rights, the put rights, rights to participate in future equity financings and provisions requiring the approval of certain limited partners for certain matters will no longer be applicable to O.P. Units so transferred, and the transferee will not have any rights to nominate persons to our Board of Directors.

Additional Capital Contributions and Loans

Each operating partnership agreement provides that, if the operating partnership requires additional funds to pursue its investment objectives, we may fund such investments by raising additional equity capital and making a capital contribution to the operating partnerships or by borrowing such funds and lending the net proceeds of such loans to the operating partnerships. If we intend to provide additional funds through a contribution to capital and purchase of units of general partner interest, the limited partners will have the right to participate in such funding on a pro rata, pari passu basis and to acquire additional O.P. Units. If the limited partners do not participate in such financing, we will acquire additional units of general partner interest. In either case, the number of additional units of partnership interest will be increased based upon the amount of the addi tional capital contributions and the value of the operating partnerships as of the date such contributions are made.

In addition, as general partner of the operating partnerships, we have the ability to cause the operating partnerships to issue additional O.P. Units. In the event that the operating partnerships issue new O.P. Units for cash but not property, the limited partners will have the right to purchase new O.P. Units at the price we offer in the transaction giving rise to such participation right in order, and to the extent necessary, to maintain their respective percentage interests in the operating partnerships.

Exchange Rights, Put Rights and Registration Rights

Under the Exchange Rights Agreement between us and the limited partners, the limited partners have exchange rights that generally became exercisable on December 29, 1999. The Exchange Rights Agreement permits every limited partner to tender O.P. Units to us, and, at our election, to receive common stock on a one-for-one basis at then-current market value, an equivalent amount of cash, or a combination of cash and common stock in exchange for the O.P. Units tendered, subject to the 9% overall ownership limit imposed on non-Berg Group stockholders under our charter document, or the overall 20% Berg Group ownership limit, as the case may be. For more information, please refer to Item 1A, “Risk Factors – Failure to satisfy federal income tax requirements for REITs could reduce our distributions, reduce our income and cause our stock price to fall.” This exchange ratio is subject to adjustment for stock splits, stock di vidends, recapitalizations of our common stock and similar types of corporate actions. In addition, once in each 12-month period beginning each December 29, the limited partners, other than Carl E. Berg and Clyde J. Berg, may exercise a put right to sell their O.P. Units to the operating partnerships at a price equal to the average market price of the common stock for the 10-trading day period immediately preceding the date of tender. Upon any exercise of the put rights, we will have the opportunity for a period of 15 days to elect to fund the purchase of the O.P. Units and purchase additional general partner interests in the operating partnerships for cash, unless the purchase price exceeds $1 million in the aggregate for all tendering limited partners, in which case, the operating partnerships or we will be entitled, but not required, to reduce proportionally the number of O.P. Units to be acquired from each tendering limited partner so that the total purchase price is not more than $1 million. Through Dec ember 31, 2009 no limited partner ever has exercised this put right.

The number of shares of our common stock issuable in exchange for the total number of O.P. Units outstanding at July 1, 1998 and the O.P. Units issued pursuant to the Pending Projects Acquisition Agreement were registered under the Securities Act and generally may be sold without restriction if they are acquired by limited partners that are not affiliates, as defined under SEC Rule 144. For more information please refer to Item 1A, “Risk Factors – Shares eligible for future sale could affect the market price of our stock.” The Exchange Rights Agreement gives the holders of O.P. Units the right to participate in any registered public offering of the common stock initiated by us to the extent of 25% of the total shares sold in the offering upon converting O.P. Units to shares of common stock, but subject to the underw riters’ unlimited right to reduce the participation of all selling stockholders. The holders of O.P. Units will be able to request resale registrations of shares of common stock acquired on exchange of O.P. Units on a Form S-3, or any equivalent form of registration statement, subject to limitations and restrictions contained in the Exchange Rights Agreement. In April 2006, we registered up to 86,088,095 shares of common stock issuable on exchange of O.P. Units for resale pursuant to the prospectus included in a registration statement on Form S-3 that the SEC declared effective on April 28, 2006. We intend to maintain the effectiveness of this registration statement in order to facilitate re-sales of shares of common stock acquired by O.P. Unit holders from time to time without volume limitations or other resale restrictions under SEC Rule 144.

Other Matters

The operating partnership agreements require that the operating partnerships be operated in a manner that will enable us to satisfy the requirements for being classified as a REIT and to avoid any federal income or excise tax liability.

The operating partnership agreements provide that the combined net operating cash flow from all the operating partnerships, as well as net sales and refinancing proceeds, will be distributed from time to time as determined by our Board of Directors, but not less frequently than quarterly, pro rata in accordance with the partners’ percentage interests in the operating partnerships, taken as a whole. This provision is intended to cause the periodic distributions per O.P. Unit and per share of our common stock to be equal. As a consequence of this provision, the capital interest of a partner in each of the operating partnerships, including our capital interests, might at times differ significantly from the partner’s percentage interest in the net income and cash flow of that operating partnership. We do not believe that such differences would have a material impact on our business, financial condition or funds available for distributions, however.

Pursuant to the operating partnership agreements, the operating partnerships will also assume and pay when due, or reimburse us for payment of, certain costs and expenses relating to our continuity of existence and operations.

The operating partnership agreements provide that, upon the exercise of an outstanding option under the 2004 Equity Incentive Plan, we may purchase additional general partner interests in the operating partnerships by contributing the exercise proceeds to the operating partnerships. Our increased interest will be equal to the percentage of outstanding shares of common stock and O.P. Units on an as-converted basis represented by the shares acquired upon exercise of the option.

Term

The operating partnerships will continue in full force and effect until December 31, 2048 or until sooner dissolved pursuant to the terms of the operating partnership agreements.

Employees

As of February 28, 2010, we employed six people, all of whom work at our executive offices at 10050 Bandley Drive, Cupertino, California, 95014.

Facilities

We lease office space at 10050 Bandley Drive, Cupertino, California from Berg & Berg Enterprises, Inc. and share clerical staff and other overhead on what we consider to be favorable terms. The total monthly rent payable by us to Berg & Berg Enterprises, Inc. is $10,000.

Item 1A. Risk Factors

You should carefully consider the following risks, together with the other information contained elsewhere in this Form 10-K. The following risks relate principally to our business and the industry in which we operate. The risks and uncertainties classified below are not the only ones we face.

Silicon Valley market and economic conditions.

In the Silicon Valley, recent market and economic conditions have been unprecedented and challenging with tighter credit conditions and slower growth through the fourth quarter of 2009. For the year ended December 31, 2009, continued concerns about the systemic impact of inflation, the availability and cost of credit and a declining real estate market have contributed to increased market volatility and diminished expectations for the Silicon Valley economy. These conditions, combined with declining business and consumer confidence and increased unemployment have contributed to volatility of unprecedented levels.

As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the Silicon Valley economy may adversely affect the financial condition and the liquidity and financial condition of our tenants and result in a significantly higher level of defaults. If these market conditions continue, they may limit our ability and the ability of our tenants, to timely refinance maturing liabilities and access the capital markets to meet liquidity needs, resulting in adverse effects on our financia l condition and results of operations.

We may be unable to renew leases or re-lease available space.

As of December 31, 2009, we had R&D space available for lease representing approximately 34.5% of the total rentable square footage of our properties. In addition, leases representing approximately 217,000 rentable square feet are scheduled to expire in 2010. Above market rental rates on some of our properties may force us to renew or re-lease expiring leases at rates below current lease rates. Declining rents in a number of our submarkets where our properties reside will affect our business adversely. We cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current rental rates. If the average rental rates for our properties decrease, existing tenants do not renew their leases or vacancy rate increase, our financial condition, results of operati ons, cash flows, the quoted trading price of our security, and our ability to satisfy our debt service obligations and to pay distributions to stockholders could be adversely affected.

We may not be able to obtain additional capital to further our business objectives.

Our ability to acquire properties depends upon our ability to obtain capital. We expect the lack of capital to cause a decrease in the level of new investment activity. An inability to obtain debt financing on acceptable terms could delay or prevent us from acquiring desirable investments.

We are dependent on Carl E. Berg, and if we lose his services our business may be harmed and our stock price could fall.

We are substantially dependent upon the leadership of Carl E. Berg, our Chairman and Chief Executive Officer. Losing Mr. Berg’s knowledge and abilities could have a material adverse effect on our business and the value of our common stock. Mr. Berg manages our day-to-day operations and devotes a significant portion of his time to our affairs, but he has a number of other business interests as well. These other activities reduce Mr. Berg’s attention to our business.

Mr. Berg and his affiliates effectively control our corporation and the operating partnerships and may act in ways that are disadvantageous to other stockholders.

Special Board Voting Provisions

Our governing corporate documents, which are our articles of amendment and restatement, or charter, and our bylaws, provide substantial control rights for the Berg Group. The Berg Group’s control of our corporation means that the value and returns from an investment in our common stock are subject to the Berg Group’s exercise of its rights. These rights include a requirement that Mr. Berg or his designee as director approve certain fundamental corporate actions, including amendments to our charter and bylaws and any merger, consolidation or sale of all or substantially all of our assets. In addition, our bylaws provide that a quorum necessary to hold a valid meeting of the Board of Directors must include Mr. Berg or his designee. The rights described in the two preceding sentences apply only as long as the Berg Group memb ers and their affiliates, other than us and the operating partnerships, beneficially own, in the aggregate, at least 15% of our outstanding shares of common stock on a Fully Diluted basis. Also, directors representing more than 75% of the entire Board of Directors must approve other significant transactions, such as incurring debt above certain amounts and conducting business other than through the operating partnerships. Without the approval of Mr. Berg or his designee, the Board of Directors’ approval that we may need for actions that might result in a sale of your stock at a premium or raising additional capital when needed could be difficult or impossible to obtain.

Board of Directors Representation

The Berg Group members have the right to designate two of the director nominees submitted by our Board of Directors to stockholders for election, as long as the Berg Group members and their affiliates, other than us and the operating partnerships, beneficially own, in the aggregate, at least 15% of our outstanding shares of common stock calculated on a Fully Diluted basis. If the Fully Diluted ownership of the Berg Group members and their affiliates, other than us and the operating partnerships, is less than 15% but is at least 10% of the common stock, the Berg Group members have the right to designate one of the director nominees submitted by our Board of Directors to stockholders for election. Its right to designate director nominees affords the Berg Group substantial control and influence over the management and direction of our c orporation. The Berg Group’s interests could conflict with the interests of our stockholders and could adversely affect the price of our common stock.

Substantial Ownership Interest

The Berg Group currently owns common stock and O.P. Units representing approximately 74.0% of the equity interests in the operating partnerships and approximately 73.8% of our equity interests on a Fully Diluted basis as of December 31, 2009. The O.P. Units may be converted into shares of common stock, subject to limitations set forth in our charter and other agreements with the Berg Group, and upon conversion would represent voting control of our corporation. The Berg Group’s ability to exchange its O.P. Units for common stock permits it to exert substantial influence over the management and direction of our corporation. This influence increases our dependence on the Berg Group.

Limited Partner Approval Rights

Mr. Berg and other limited partners, including other members of the Berg Group, may restrict our operations and activities through rights provided under the terms of the amended and restated agreement of limited partnership which governs each of the operating partnerships and our legal relationship to each operating partnership as its general partner. Matters requiring approval of the holders of a majority of the O.P. Units, which necessarily would include the Berg Group, include the following:

·	the amendment, modification or termination of any of the operating partnership agreements;

·	the transfer of any general partner interest in the operating partnerships, including, with certain exceptions, transfers attendant to any merger, consolidation or liquidation of our corporation;

·	the admission of any additional or substitute general partners in the operating partnerships;

·	any other change of control of the operating partnerships;

·	a general assignment for the benefit of creditors or the appointment of a custodian, receiver or trustee for any of the assets of the operating partnerships; and

·	the institution of any bankruptcy proceeding for any operating partnership.

In addition, as long as the Berg Group members and their affiliates, other than us and the operating partnerships, beneficially own, in the aggregate, at least 15% of the outstanding shares of common stock on a Fully Diluted basis, the consent of the limited partners holding the right to vote a majority of the total number of O.P. Units outstanding is also required with respect to:

·	the sale or other transfer of all or substantially all of the assets of the operating partnerships and certain mergers and business combinations resulting in the complete disposition of all O.P. Units;

·	the issuance of limited partnership interests senior to the O.P. Units as to distributions, assets and voting; and

·	the liquidation of the operating partnerships.

The liquidity of an investment in our common stock, including our ability to respond to acquisition offers, will be subject to the exercise of these rights.

Our contractual business relationships with the Berg Group present additional conflicts of interest, which may result in the realization of economic benefits or the deferral of tax liabilities by the Berg Group without equivalent benefits to our stockholders.

Our contracts with the Berg Group provide it with interests that could conflict with those of our other stockholders, including the following:

·	our headquarters are leased from an entity owned by the Berg Group, to whom we pay rent of $10,000 per month;

·	the Berg Group is permitted to conduct real estate and business activities other than our business;

if we decline an opportunity that has been offered to us under the terms of the Berg Land Holdings Option Agreement and the Acquisition Agreement, the Berg Group may pursue it, which would reduce the amount of time that Mr. Berg could devote to our affairs and could result in the Berg Group’s development of properties that compete with our properties for tenants;

·	in general, we have agreed to limit the liability of the Berg Group to our corporation and our stockholders arising from the Berg Group’s pursuit of these other opportunities;

·	we acquired most of our properties from the Berg Group on terms that were not negotiated at arm’s length and without many customary representations and warranties that we would have sought in an acquisition from an unrelated party; and

·	we have assumed liability for debt to the Berg Group and debt for which the Berg Group was liable.

The Berg Group has agreed that the Independent Directors Committee of our Board of Directors must approve all new transactions between us and any of its members, or between us and any entity in which it directly or indirectly owns 5% or more of the equity interests, including the operating partnerships for this purpose. This committee currently consists of three directors who are independent of the Berg Group.

Berg Land Holdings

The Berg Group owns several parcels of unimproved land in the Silicon Valley that the operating partnerships and we have the right to acquire under the terms of the Berg Land Holdings Option Agreement. We have agreed to pay an amount based on pre-negotiated terms for any of the properties that we do acquire. We must pay the acquisition price in cash unless the Berg Group elects, in its discretion, to receive O.P. Units valued at the average market price of a share of common stock during the 30-trading-day period preceding the acquisition date. At the time of acquisition, which is subject to the approval of the Independent Directors Committee, these properties may be encumbered by debt that we or the operating partnerships will be required to assume or repay. The use of our cash or an increase in our indebtedness to acquire these properties could have a material adverse effect on our financial condition, results of operations and ability to make cash distributions to our stockholders. This agreement will expire on December 31, 2010, after which we will no longer have the right to acquire properties from the Berg Group or the pre-determined terms provided in that agreement.

Terms of Transfers: Enforcement of Agreement of Limited Partnership

The terms of the Pending Projects Acquisition Agreement, the Berg Land Holdings Option Agreement, the partnership agreement of each operating partnership and other material agreements through which we have acquired our interests in the operating partnerships and the properties formerly controlled by the Berg Group were not determined through arm’s-length negotiations and could be less favorable to us than those obtained from an unrelated party. In addition, Mr. Berg and representatives of the Berg Group sitting on our Board of Directors may be subject to conflicts of interests with respect to their obligations as our directors to enforce the terms of the partnership agreement of each operating partnership when such terms conflict with their personal interests. The terms of our charter and bylaws also were not determined through arm’s-length negotiations. Some of these terms, including representations and warranties applicable to acquired properties, are not as favorable as those that we would have sought through arm’s-length negotiations with unrelated parties. As a result, an investment in our common stock may involve risks not found in businesses in which the terms of material agreements have been negotiated at arm’s length.

Related Party Debt

We are liable to the Berg Group under a mortgage loan of approximately $8.3 million due in June 2013, which was extended from the original maturity date of June 2010, in connection with our acquisition of the 5300-5350 Hellyer Avenue R&D properties that we acquired in May 2000 under the Berg Land Holdings Option Agreement. Funds from operations have not been sufficient to fund both full dividend distributions and debt service. The Berg Group has been providing short-term funding for dividend distributions but is not obligated to do so. As of the date of this report, our total short-term debt owed to the Berg Group is approximately $33.9 million. We rely on these short-term loans from the Berg Group, which may not always be available. If they are not available we will have to find other probably more expensive sources o f funding or reduce dividend distributions. If we are unable to repay our debt to the Berg Group when due, the Berg Group could take action to enforce our payment obligations. Potential actions by the Berg Group to enforce these obligations could result in the foreclosure in one or more of our properties and a reduction in the amount of cash distributions to our stockholders. In turn, if we fail to meet the minimum distributions test because of a loan default or another reason, we could lose our REIT classification for federal income tax purposes. For more information please refer to Item 1A, “Risk Factors – Failure to satisfy federal income tax requirements for REITs could reduce our distributions, reduce our income and cause our stock price to fall.”

Our option to acquire on fixed terms R&D properties developed on existing land and land acquired in the future by the Berg Group will terminate when the Berg Group’s ownership interest has been reduced, or if earlier, on December 31, 2010.

The Berg Land Holdings Option Agreement, as amended, which provides us with significant benefits and opportunities to acquire additional R&D properties from the Berg Group ,on fixed terms will expire on the earlier of December 31, 2010 and the date on which the Berg Group and their affiliates (excluding us and the operating partnerships) own less than 65% of our common stock on a Fully Diluted basis. Although we do not currently perceive growth opportunities from the land that is subject to the Berg Land Holdings Option Agreement, it is possible that the termination of that agreement will result in limitation of our growth, which could cause our stock price to fall.

We may change our investment and financing policies and increase your risk without stockholder approval.

Our Board of Directors determines the investment and financing policies of the operating partnerships and our policies with respect to certain other activities, including our business growth, debt capitalization, distribution, and operating policies. Our Board of Directors may amend these policies at any time without a vote of the stockholders. Changes in these policies could materially adversely affect our financial condition, results of operations and ability to make cash distributions to our stockholders, which could harm our business and cause our stock price to fall. For more information please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Policies with Respect to Certain Activities.”

Anti-takeover provisions in our charter could prevent acquisitions of our stock at a substantial premium.

Provisions of our charter and our bylaws could delay, defer or prevent a transaction or a change in control of our corporation, or a similar transaction, that might involve a premium price for our shares of common stock or otherwise be in the best interests of our stockholders. Provisions of the Maryland general corporation law, which would apply to potential business combinations with acquirers other than the Berg Group or stockholders who invested in us in December 1998, also could prevent the acquisition of our stock for a premium, as discussed in “Certain Provisions of Maryland Law and of our Charter and Bylaws.”

An investment in our stock involves risks related to real estate investments that could harm our business and cause our stock price to fall.

Rental Income Varies

Real property investments are subject to varying degrees of risk. Investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation, which our properties generate, as well as our related expenses incurred. If our properties do not generate revenues sufficient to meet operating expenses, debt service and capital expenditures, our income and ability to make distributions to our stockholders will be adversely affected. Income from our properties may also be adversely affected by general economic conditions, local economic conditions such as oversupply of commercial real estate, the attractiveness of our properties to tenants and prospective tenants, competition from other available rental property, our ability to provide adequate maintenance and insurance, th e cost of tenant improvements, leasing commissions and tenant inducements and the potential of increased operating costs, including real estate taxes.

Competitive Market

We face significant competition, which may decrease the occupancy and rental rates of our properties. We compete with several developers, owners, and operators of office, industrial, and other commercial real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. Our competitors have an incentive to decrease rental rates until their available space is leased. If our competitors offer space at rental rates below the rates currently charged by us for comparable space, we may be pressured to reduce our rental rates below those currently charged in order to retain tenants when our tenant leases expire. As a result, our financial condition, results of operations, cash flow, the quoted trading prices of our securities, and our ability to satisfy our debt service obligations and to p ay distributions to stockholders may be adversely affected.

Expenditures for Property Ownership are Fixed

Income from properties and real estate values also are affected by a variety of other factors, such as governmental regulations and applicable laws, including real estate, zoning and tax laws, interest rate levels and the availability of financing. Various significant expenditures associated with an investment in real estate, such as mortgage payments, real estate taxes and maintenance expenses, generally are not reduced when circumstances cause a reduction in revenue from the investment. Thus, our operating results and our cash flow may decline materially if our rental income is reduced.

Illiquidity

Real estate investments are relatively illiquid, which limits our ability to restructure our portfolio in response to changes in economic or other conditions.

Geographic Concentration

All of our properties are located in the southern portion of the San Francisco Bay Area commonly referred to as the “Silicon Valley.” The Silicon Valley economy has weakened after relatively recent years and there remains significant excess capacity for R&D properties in the Silicon Valley. At present, future increases in values and rents for our properties depend to a significant extent on a strong recovery of this region’s economy, which we do not currently foresee.

Loss of Key Tenants

Single tenants, many of whom are large, publicly traded information technology companies, occupy most of our properties. We may lose tenants when existing leases expire because it may be difficult to re-lease the same property due to substantial overcapacity of R&D properties in the Silicon Valley at present. Losing a key tenant could adversely affect our operating results and our ability to make distributions to stockholders if we are unable to obtain replacement tenants promptly. Moreover, to retain key tenants upon the expiration of existing leases we may need to reduce rents, which also could adversely affect our operating results and ability to make distributions.

Tenant Bankruptcies

Key tenants could seek the protection of the bankruptcy laws, which could result in the rejection and termination of their leases, thereby causing a reduction in our rental income. Under the bankruptcy laws, these tenants may have the right to reject their leases with us and our claim for rent will be limited to the greater of one year or 15% of the total amount owing under the leases upon default, but not to exceed three years of the remaining term of the lease following the earlier of the petition filing date or the date on which we gained repossession of the property, as well as any rent that was unpaid on the earlier of those dates.

Our Substantial Indebtedness

Our properties are subject to substantial indebtedness. If we are unable to make required mortgage payments, we could sustain a loss as a result of foreclosure on our properties by the mortgagor. Furthermore, our mortgage loans may be subject to covenants that we are obligated to satisfy. For example, under our mortgage loan agreements with Northwestern Mutual Life Insurance Company, the payment of all $77.4 million outstanding could be accelerated upon the sale or certain other transfers of more than 51% of the total number of O.P. Units and shares of our common stock held by the members of the Berg Group. We have no reason to expect such a sale or transfer in the foreseeable future, but the members of the Berg Group have no obligation to us to refrain from any such sale or other transfer. We have adopted a policy of maintaining a c onsolidated ratio of debt to total market capitalization, which includes for this purpose the market value of all shares of common stock for which outstanding O.P. Units are exchangeable, of less than 50%. This ratio may not be exceeded without the approval of more than 75% of our entire Board of Directors. Our Board of Directors may vote to change this policy, however, and we could become more highly leveraged, resulting in an increased risk of default on our obligations and an increase in debt service requirements that could adversely affect our financial condition, our operating results and our ability to make distributions to our stockholders.

Environmental Clean-Up Liabilities

Our properties may expose us to liabilities under applicable environmental and health and safety laws. If these liabilities are material, our financial condition and ability to pay cash distributions may be affected adversely, which would cause our stock price to fall.

Uninsured Losses

We may sustain uninsured losses with respect to some of our properties. If these losses are material, our financial condition, our operating results and our ability to make distributions to our stockholders may be affected adversely.

Earthquake Damages are Uninsured

All of our properties are located in areas that are subject to earthquake activity. Our insurance policies do not cover damage caused by seismic activity although they do cover losses from fires after an earthquake. We generally do not consider such insurance coverage to be economical. If an earthquake occurs and results in substantial damage to our properties, we could lose our investment in those properties, which loss could have a material adverse effect on our financial condition, our operating results and our ability to make distributions to our stockholders.

Our real estate assets may be subject to impairment charges.

We continually evaluate the recoverability of the carrying value of our real estate assets for impairment indicators. Factors considered in evaluating impairment of our existing real estate assets include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Generally, a real estate asset is not considered impaired if the undiscounted, estimated future cash flows of the asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Assumptions used to estimate annual and residual cash flow, the estimated holding period of such assets, the lease up period when properties are vacant and future rental income require the judgment of management. Actual results could be different than our estimates.

There can be no assurance that we will not take impairment charges in the future related to the impairment of our assets. As of the years ended December 31, 2009, 2008 and 2007, management believed it had applied reasonable estimates and judgments in determining the proper classification of its real estate assets. However, should external or internal circumstances change requiring the need to shorten the holding periods or adjust the estimated future cash flows of certain of our assets, we could be required to record additional impairment charges. If any real estate asset held for sale is considered impaired, a loss is provided to reduce the carrying value of the asset to its fair value, less selling costs. Any future impairment could have a material adverse affect on our results of operations and funds from operations in the pe riod in which the charge is taken.

Failure to satisfy federal income tax requirements for REITs could reduce our distributions, reduce our income and cause our stock price to fall.

Failure to Qualify as a REIT

Although we currently operate in a manner designed to enable us to qualify and maintain our REIT status, it is possible that economic, market, legal, tax or other considerations may cause us to fail to qualify as a REIT or may cause our Board of Directors either to refrain from making the REIT election or to revoke that election once made. To maintain REIT status, we must meet certain tests for income, assets, distributions to stockholders, ownership interests, and other significant conditions. If we fail to qualify as a REIT in any taxable year, we will not be allowed a deduction for distributions to our stockholders in computing our taxable income and would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Moreover, unless we were entitled to relief under certain provisions of the tax laws, we would be disqualified from treatment as a REIT for the four taxable years following the year in which our qualification was lost. As a result, funds available for distributions to our stockholders would be reduced for each of the years involved and, in addition, we would no longer be required to make distributions to our stockholders.

REIT Distribution Requirements

To maintain REIT status, we must distribute as a dividend to our stockholders at least 90% of our otherwise net taxable income, after certain adjustments, with respect to each tax year. We also may be subject to a 4% non-deductible excise tax in the event our distributions to stockholders fail to meet certain other requirements. Failure to comply with these requirements could result in our income being subject to tax at regular corporate rates and could cause us to be liable for the excise tax.

Ownership Limit Necessary to Maintain REIT Qualification

As a REIT, the federal tax laws restrict the percentage of the total value of our stock that may be owned by five or fewer individuals to 50% or less. Our charter generally prohibits the direct or indirect ownership of more than 9% of our common stock by any stockholder. This limit excludes the Berg Group, which has an aggregate ownership limit of 20%. In addition, as permitted by our charter, our Board of Directors has authorized an exception applicable to two other stockholders that permits them to collectively own, directly or indirectly, up to 18.5% of our common stock on an aggregate basis, subject to the terms of an ownership limit exemption agreement. In general, our charter prohibits the transfer of shares that result in a loss of our REIT qualification and provides that any such transfer or any other transfer that causes a s tockholder to exceed the ownership limit will result in the shares being automatically transferred to a trust for the benefit of a charitable beneficiary. Accordingly, in the event that either the Berg Group or the two stockholders increase their stock ownership in our corporation, a stockholder who acquires shares of our common stock, even though his, her or its aggregate ownership may be less than 9%, may be required to transfer a portion of that stockholder’s shares to such a trust in order to preserve our status as a REIT.

Stockholders are not assured of receiving cash distributions from us.

Our income consists primarily of our share of the income of the operating partnerships, and our cash flow consists primarily of our share of distributions from the operating partnerships. Differences in timing between the receipt of income and the payment of expenses in arriving at our taxable income or the taxable income of the operating partnerships and the effect of required debt amortization payments could require us to borrow funds, directly or through the operating partnerships, on a short-term basis to meet our intended distribution policy.

Our Board of Directors will determine the amount and timing of distributions by the operating partnerships and of distributions to our stockholders. Our Board of Directors will consider many factors prior to making any distributions, including the following:

·	the amount of cash available for distribution;

·	availability of financing;

·	our financial condition;

·	whether to reinvest funds rather than to distribute such funds;

·	our committed and projected capital expenditures;

·	the amount of cash required for new property acquisitions, including acquisitions under our existing agreements with the Berg Group;

·	the amount of our annual debt service requirements;

·	the annual distribution requirements under the REIT provisions of the federal income tax laws;

·	our projected rental rates and revenues;

·	our ability to collect rent payments;

·	prospects of tenant renewals and re-leases of properties subject to expiring leases;

·	cash required for re-leasing activities; and

·	such other factors as our Board of Directors deem relevant.

We cannot assure you that we will be able to meet or maintain our cash distribution objectives.

Our properties could be subject to property tax reassessments.

We do not believe that the acquisition of any of our interests in the operating partnerships has resulted in a statutory change in ownership that could give rise to a reassessment of any of our properties for California property tax purposes. We cannot assure you, however, that county assessors or other tax administrative agencies in California will not attempt to assert that such a change occurred as a result of these transactions. Although we believe that such a challenge would not be successful ultimately, we cannot assure you regarding the outcome of any related dispute or proceeding. A reassessment could result in increased real estate taxes on our properties that, as a practical matter, we may be unable to pass through to our tenants in full. This could reduce our net income and our funds available for distributions and cause o ur stock price to fall.

Our obligation to purchase tendered O.P. Units could reduce our cash distributions.

Each of the limited partners of the operating partnerships, other than Carl E. Berg and Clyde J. Berg, has the annual right to cause the operating partnerships to purchase the limited partner’s O.P. Units at a purchase price based on the average market value of the common stock for the ten-trading-day period immediately preceding the date of tender. Upon a limited partner’s exercise of any such right, we will have the option to purchase the tendered O.P. Units with available cash, borrowed funds or the proceeds of an offering of newly issued shares of common stock. These put rights became exercisable on December 29, 1999, and are available once during a 12-month period. If the total purchase price of the O.P. Units tendered by all of the eligible limited partners in one year exceeds $1 million, the operating partnerships or we will be entitled, but not required, to reduce proportionately the number of O.P. Units to be acquired from each tendering limited partner so that the total purchase price does not exceed $1 million. Thus, we might repurchase O.P. Units for a total purchase price of more than $1 million in one year. The exercise of these put rights may reduce the amount of cash that we have available to distribute to our stockholders and could cause our stock price to fall.

In addition, all O.P. Unit holders may tender their O.P. Units to us in exchange for shares of common stock on a one-for-one basis at then-current market value or an equivalent amount in cash, at our election. If we elect to pay cash for the O.P. Units, our liquidity may be reduced and we may lack sufficient funds to continue paying the amount of our anticipated or historical cash distributions. This could cause our stock price to fall.

Shares eligible for future sale could affect the market price of our stock.

We cannot predict the effect, if any, that future sales of shares of common stock, or the availability of shares for future sale, could have on the market price of our common stock. As of December 31, 2009, all outstanding shares of our common stock, other than shares controlled by affiliates, were eligible for sale in the public market without resale restrictions under the federal securities laws. Sales of substantial amounts of common stock, including shares issued in connection with the exercise of the exchange rights held by the limited partners of the operating partnerships, or the perception that such sales could occur, could adversely affect prevailing market prices for the common stock. Additional shares of common stock may be issued to limited partners, subject to the applicable REIT qualification ownership limit, if they exch ange their O.P. Units for shares of common stock pursuant to their exchange rights, or may be sold by us to raise funds required to purchase such O.P. Units if eligible limited partners elect to tender O.P. Units to us using their put rights. Shares of stock controlled by our affiliates may be sold subject to Rule 144, including the limitation under Rule 144(e) on the number of shares that may be sold within a three-month period. In addition, pursuant to a registration statement on Form S-3 declared effective by the SEC in April 2006, all shares of common stock acquired upon exchange of currently outstanding O.P. Units may be resold without any such restrictions. Additional common stock reserved under our 2004 Equity Incentive Plan, including stock options, also may be sold in the market at some time in the future. Future sales of our common stock in the market could adversely affect the price of our common stock.

Market interest rates may reduce the value of the common stock.

One of the factors that investors consider important in deciding whether to buy or sell shares of a REIT is the distribution rate on such shares, as a percentage of the price of such shares, relative to market interest rates. If market interest rates go up, prospective purchasers of REIT shares may expect a higher distribution rate. Higher interest rates would not, however, increase the funds available for us to distribute, and, in fact, would likely increase our borrowing costs and decrease funds available for distributions. Thus, higher market interest rates could cause the price of our common stock to fall.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Geographic and Tenant Focus

We focus principally on the facility requirements of information technology companies in the Silicon Valley, which include space for office, R&D, light manufacturing and assembly. With the Silicon Valley’s highly educated and skilled work force, history of numerous successful start-up companies and large contingent of venture capital firms, we believe that this region will, following the current significant slowdown in the market, continue to spawn successful new high-growth industries and entrepreneurial businesses to an extent matched nowhere else in the United States. We believe that our focus and thorough understanding of the Silicon Valley real estate market enables us to:

·	anticipate trends in the market;

·	identify and concentrate our efforts on the most favorably located sub-markets;

·	take advantage of our experience and extensive contacts and relationships with local government agencies, real estate brokers and subcontractors, as well as with tenants and prospective tenants; and

·	identify strong tenants.

All of our properties are general-purpose R&D/office type properties located in desirable sub-markets of the Silicon Valley. Many of our properties have been developed for or leased to single tenants, many of whom are large, publicly traded information technology companies. Most of our major tenants have occupied our properties for many years under triple-net leases that require the tenant to pay substantially all operating costs, including property insurance, real estate taxes and general operating costs.

Leasing

The current leases for our properties have terms ranging from month-to-month to 12 years. Most of the leases provide for fixed periodic rental increases. Substantially all of the leases are triple-net leases pursuant to which the tenant is required to pay substantially all of the property operating expenses, including all maintenance and repairs, property taxes and insurance, and excluding only certain structural repairs to the building shell. Most of the leases contain renewal options that allow the tenant to extend the lease based on adjustments to then prevailing market rates, or based on fixed rental adjustments, which may be at or below market rates.

Property Portfolio

All of our properties are R&D/office type properties. Generally, these properties are one- to two-story buildings of tilt-up concrete construction, have on average 3.5 or more parking spaces per thousand rentable square feet, clear ceiling heights of less than 18 feet, and range in size from approximately 4,500 to 211,000 rentable square feet. Most of the office space is open and suitable for configuration to meet the tenants’ requirements with the use of movable dividers.

The following table sets forth certain information relating to our properties as of December 31, 2009:

Location	No. of Properties	Total Rentable Sq. Ft.	Percentage Occupied as of Dec. 31, 2009	Average 2009 Occupancy	Major Tenants	Major Tenants Rentable Sq. Ft. at 12/31/09	2009 Annual Base Rent (1)
5300-5350 Hellyer Avenue (2)	2	160,000	100%	100%	Tyco Electronics Corporation	160,000	$3,959,614

10401-10411 Bubb Road (2)	1	20,330	78%	78%	Aeroflex, Inc.	15,830	246,952

45365 Northport Loop West	1	64,218	15%	8.6%	Optovue, Inc.	9,373	28,120

45738 Northport Loop West	1	44,256	100%	100%	Quicksil, Inc.	44,256	632,861

4050 Starboard Drive	1	52,232	100%	100%	Flash Electronics, Inc.	52,232	519,813

3501 West Warren Avenue & 46600 Fremont Boulevard	1	67,864	24%	24%	Sunnyvale Fluid System Tech, Inc.	16,524	145,200

48800 Milmont Drive	1	53,000	0%	0%	Vacant	-	-

4750 Patrick Henry Drive	1	63,105	100%	100%	Infoblox, Inc.	63,105	541,441

Triangle Technology Park (2)	7	416,927	78%	77%	Intevac Corporation Xicom Technology, Inc. LSA Cleanpart, LLC SASCO	169,795 72,336 28,300 25,350	3,405,533

Location

No. of Properties

Total

Rentable

Sq. Ft.

Percentage

Occupied as of

Dec. 31, 2009

Average 2009 Occupancy

Major Tenants

Major Tenants Rentable

Sq. Ft. at 12/31/09

2009 Annual

Base Rent (1)


5830-5870 Hellyer Avenue	1	109,715	71%	64%	Shocking Technologies, Inc. MeiVac, Inc.	51,859 26,557	689,156

5750 Hellyer Avenue	1	73,312	100%	100%	NDS Surgical Imaging, LLC	73,312	712,004

5500-5550 Hellyer Avenue	2	196,534	67%	67%	CTS Corporation Snap-on, Inc.	78,794 52,243	1,987,264

5400 Hellyer Avenue	1	77,184	60%	53%	Quantum 3D, Inc. Capella, Inc.	24,777 21,750	545,472

5325-5345 Hellyer Avenue	2	256,500	100%	100%	Celestica Asia, Inc.	256,500	6,150,192

5905-5965 Silver Creek Valley Rd.	4	346,000	0%	0%	Vacant	-	-

5845 Hellyer Avenue	1	98,500	0%	0%	Vacant	-	-

855 Embedded Way	1	67,912	100%	100%	Celestica Asia, Inc. Lynuxworks, Inc.	39,039 28,873	1,068,000

1065-1105 La Avenida Street	5	515,700	100%	100%	Microsoft Corporation	515,700	12,873,252

1875 Charleston Road	1	42,126	100%	100%	Netlogic Microsystems, Inc.	42,126	893,028

1750 Automation Parkway	1	80,641	100%	100%	JDS Uniphase Corporation	80,641	1,514,918

1756 Automation Parkway	1	80,640	36%	36%	A&D Engineering, Inc.	28,739	326,883

1762 Automation Parkway	1	61,100	100%	100%	Hermes Microvision, Inc.	61,100	730,470

1768 Automation Parkway	1	110,592	67%	67%	2Wire, Inc.	74,584	930,504

255 Caspian Drive	1	119,756	100%	100%	Equinix Operating Company, Inc.	119,756	2,608,286

245 Caspian Drive (3)	1	-	-	-	-	-	-

5981 Optical Court	1	110,542	100%	100%	SoloPower, Inc.	110,542	2,252,400

5970 Optical Court	1	128,520	100%	100%	Orbotech Ltd.	128,520	1,937,961

5900 Optical Court	1	165,000	100%	100%	Stryker Corporation	165,000	3,581,316

2630 Orchard Parkway	1	60,633	0%	0%	Vacant	-	-

2610 Orchard Parkway	1	54,093	0%	0%	Vacant	-	-

55 West Trimble Road	1	91,722	0%	0%	Vacant	-	-

2001 Walsh Avenue	1	80,000	100%	100%	Nvidia Corporation	80,000	981,415

2880 Scott Boulevard	1	200,000	100%	100%	NEC Electronics America, Inc.	200,000	2,720,784

2890 Scott Boulevard	1	75,000	100%	100%	Nvidia Corporation	75,000	1,602,564

2770-2800 Scott Boulevard	1	99,800	100%	100%	Nvidia Corporation	99,800	1,352,794

2300 Central Expressway	1	46,338	0%	16%	Vacant	46,338	111,192

2220 Central Expressway	1	62,522	100%	100%	Tellabs, Inc.	62,522	766,710

2330 Central Expressway	1	62,522	100%	100%	Huawei Technologies Company Ltd.	62,522	850,678

233 South Hillview Drive	2	95,690	100%	100%	Exar Corporation	95,690	1,370,178

2251 Lawson Lane	1	125,000	51%	51%	Synaptics, Inc.	64,270	1,159,903

1230 East Arques	1	60,000	100%	100%	Fujitsu	60,000	349,964

1250 East Arques	4	200,000	100%	100%	Fujitsu	200,000	869,311

Location

No. of Properties

Total

Rentable

Sq. Ft.

Percentage

Occupied as of

Dec. 31, 2009

Average 2009 Occupancy

Major Tenants

Major Tenants Rentable

Sq. Ft. at 12/31/09

2009 Annual

Base Rent (1)


20400 Mariani Avenue	1	105,000	100%	100%	Apple, Inc.	105,000	626,743

10500 De Anza Boulevard	1	211,000	100%	100%	Apple, Inc.	211,000	4,192,686

20605-705 Valley Green Drive	2	142,000	100%	100%	Apple, Inc.	142,000	2,562,475

10300 Bubb Road	1	23,400	100%	100%	Apple, Inc.	23,400	285,714

10440 Bubb Road	1	19,500	100%	100%	Novare Surgical Systems, Inc.	10,833	281,776

10450-10460 Bubb Road	1	45,460	100%	100%	Ricoh Corporation VMWare, Inc.	30,460 15,000	736,123

1135 Kern Avenue	1	18,300	0%	0%	Vacant	-	-

450 National Avenue	1	36,100	0%	0%	Vacant	-	-

3301 Olcott Street	1	64,500	0%	0%	Vacant	-	-

2800 Bayview Avenue	1	59,736	0%	0%	Vacant	-	-

5521 Hellyer Avenue	1	203,800	44%	44%	Nanosolar, Inc.	89,040	710,512

6850 Santa Teresa Boulevard	1	30,000	41%	41%	Bio-Medical Applications of CA	12,350	125,645

6810 Santa Teresa Boulevard & 180 Great Oaks Boulevard	1	54,996	87%	87%	ZiLOG, Inc.	40,527	634,938

140-160 Great Oaks Boulevard & 6781 Via Del Oro	2	105,300	100%	88%	Semiconductor Tooling Services Instant Asphalt, Inc. Santa Clara Valley Water District	53,300 26,571 25,429	796,687

6540-6541 Via Del Oro & 6385-6387 San Ignacio Avenue	2	66,600	53%	50%	Modutek Corporation	15,000	270,607

6311-6351 San Ignacio Avenue	5	362,767	52%	54%	Saint Gobain Stion Corporation Teledex, LLC	95,953 64,435 30,000	3,215,061

6320-6360 San Ignacio Avenue	1	157,292	0%	4%	Vacant	-	123,780

75 East Trimble Road & 2610 North First Street	2	170,810	59%	59%	Comerica, Inc.	93,984	1,197,222

2904 Orchard Parkway	1	75,335	100%	100%	BAE Systems Land & Armaments	75,335	1,258,095

3236 Scott Boulevard	1	54,672	100%	100%	Mimix Broadband, Inc.	54,672	759,267

1212 Bordeaux Lane	1	71,800	100%	100%	Loral Space & Communications, Inc.	71,800	744,006

McCandless Technology Park	14	705,958	13%	18%	STATS ChipPAC, Inc. Rorze Automation, Inc.	33,984 11,087	835,250

1600 Memorex Drive	1	107,500	21%	21%	International Network Services, Inc.	22,800	231,366

1688 Richard Avenue	1	52,800	100%	100%	NWE Technology, Inc.	52,800	442,648

1700 Richard Avenue	1	58,783	100%	100%	Silicon Valley Colocation, Inc.	58,783	1,177,303

Morgan Hill Land (4)	-	-	-	-	-	-	-

300 Montague Expressway	1	49,457	0%	0%	Vacant	-	27,037

337 Trade Zone Boulevard	1	42,912	0%	0%	Vacant	-	-

324-368 Montague Expressway	1	56,265	0%	0%	Vacant	-	-

TOTAL	111	8,047,569	66%				$81,651,074

(1)	Annual cash rents do not include the recognition of rental income on the straight-line method of accounting required by accounting principles generally accepted in the United States of America (“GAAP”) under which contractual rent payment increases are recognized evenly over the lease term.

(2)	Joint venture properties.

(3)	Property represents a commitment by the Berg Group to construct an approximate 75,000 to 90,000 square foot building on land acquired during 2001.

(4)	This property comprises of 55 acres of vacant land, which could support approximately 800,000 rentable square feet of space. The vacant land is currently zoned for industrial use and a portion has the potential to be rezoned for residential use.

We own 100% of all of the properties listed in the table, except: one of the buildings in the Triangle Technology Park, which is owned by a joint venture in which we, through an operating partnership, own a 75% interest; the property at 10401-10411 Bubb Road, which is owned by a joint venture in which we, through an operating partnership, own an 83.33% interest; and the properties at 5300-5350 Hellyer Avenue, which are owned by a joint venture in which we, through an operating partnership, own a 50% interest, and a Berg affiliate owns the other 50% venture interest.

For the years ended December 31, 2009, 2008 and 2007, the occupancy rates for leased properties in our portfolio were 65.5%, 66.4% and 61.7%, respectively.

The average annual rental per square foot for our portfolio of properties for the years ended December 31, 2009, 2008 and 2007 was approximately $15.58, $14.97 and $17.05, respectively.

Schedule of Lease Expirations

The following table sets forth a schedule of the lease expirations for the properties beginning with 2010, assuming that none of the tenants exercise existing renewal options or termination rights. The table excludes 2,789,338 rentable square feet that were vacant as of December 31, 2009.

Year of Lease Expiration	Number of Expiring Leases	Rentable Square Footage Subject to Expiring Leases (1)	2010 Annual Base Rent Under Expiring Leases (2)	Percentage of Total Annual Base Rent Represented By Expiring Leases (3)
2010	9	217,003	$2,155,923	2.6%
2011	17	844,452	13,107,735	15.7%
2012	14	1,010,825	15,486,191	18.5%
2013	6	397,215	5,431,036	6.5%
2014	17	1,492,430	26,537,863	31.8%
2015	7	613,556	9,784,061	11.7%
2016	3	159,600	3,421,710	4.1%
2017	5	349,949	4,888,985	5.9%
Thereafter	1	119,756	2,695,260	3.2%
	79	5,204,786	$83,508,764	100%

(1)	Excludes approximately 53,000 rentable square feet which are on month-to-month leases.

(2)	The base rent for expiring leases is based on 2010 scheduled cash rent, which is different than annual rent determined in accordance with GAAP.

(3)	Based upon 2010 cash rent as discussed in Note (1).

If we are unable to lease a significant portion of the available space and space scheduled to expire in 2010 and thereafter at any of our properties; if existing tenants do not renew their leases; or if rental rates decrease, our results of operations, financial condition and cash flows would be affected adversely.

Environmental Matters

To date, compliance with laws and regulations relating to the protection of the environment, including those regarding the discharge of materials into the environment has not had any material effects upon our capital expenditures, earnings or competitive position.

Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. Such laws often impose liability on the owner and expose the owner to governmental proceedings without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of any required remediation or removal of such substances may be substantial. In addition, the owner’s liability as to any specific property is generally not limited and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remove or remediate such substances, may also adversely affect the owner’s ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for treatment or the disposal of hazardous or toxic substances may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at a disposal facility, regardless of whether the facility is owned or operated by such owner or entity. In connection with the ownership of the properties or the treatment or disposal of hazardous or toxic substances, we may be liable for such costs.

Some of our properties are leased, in part, to businesses, including manufacturers that use, store or otherwise handle hazardous or toxic substances in their business operations. These operations create a potential for the release of hazardous or toxic substances. In addition, groundwater contaminated by chemicals used in various manufacturing processes, including semiconductor fabrication, underlies a significant portion of northeastern Santa Clara County, where many of our properties are located.

Environmental laws also govern the presence, maintenance and removal of asbestos. These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they adequately inform or train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement in the event that asbestos is disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. We are aware that there are asbestos-containing materials (“ACMs”), present at several of the properties, primarily in floor coverings. We believe that the ACMs present at these properties are generally in good condition and that no ACMs are present at the remaining properties. We believe we are in compliance in all material respects with all present federal, state and local laws relating to ACMs and that if we were given limited time to remove all ACMs present at the properties, the cost of such removal would not have a material adverse effect on our financial condition, results of operations and ability to make cash distributions to our stockholders.

Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. Environmental assessments have been conducted for about half of the properties.

The environmental investigations that have been conducted on our properties have not revealed any environmental liability that we believe would have a material adverse effect on our financial condition, results of operations and assets. To the extent any environmental report or investigation reveals environmental issues, the tenant is responsible for the cost of any remediation under the terms and conditions of our lease agreement and the law. Nonetheless, it is possible that there are material environmental liabilities of which we are unaware. We cannot assure you that future laws, ordinances, or regulations will not impose any material environmental liability, or that the current environmental condition of the properties has not been, or will not be, affected by tenants and occupants of the properties, by the condition o f properties in the vicinity of the properties, or by third parties unrelated to us.

Item 3. Legal Proceedings

Neither the operating partnerships, our properties nor we are subject to any material litigation nor, to our knowledge, is any material litigation threatened against the operating partnerships, our properties or us. From time to time, we are engaged in legal proceedings arising in the ordinary course of our business. We do not expect any of such proceedings to have a material adverse effect on our cash flows, financial condition or results of operations. We are currently involved in the following legal proceedings and we believe that the ultimate outcome of these proceedings will not have a material adverse effect on our operating results, cash flows or financial condition.

Mission West Properties, L.P. v. Republic Properties Corporation (“RPC”), et al. Santa Clara County Superior Court, Case No. CV 796249. In February 2001, while the Maryland case was pending, we filed a suit against RPC in the Superior Court of the State of California for the County of Santa Clara, Case No. CV 796249. The case was stayed pending resolution of the Maryland case, and we dismissed our suit on March 4, 2005. In April 2005, RPC submitted a motion asking the superior court to reinstate the case, which the court granted on May 25, 2005. In April 2006, the Maryland case was dismissed by the highest court in Maryland for lack of personal jurisdiction. On July 5, 2006, RPC filed a cross-complaint in the case seeking partnership distributions to whic h we demurred. The court sustained our demurrer with leave to amend. Subsequently, RPC filed an amended complaint, and we submitted another demurrer seeking dismissal of the claims on statute of limitations grounds. On February 20, 2007, the court overruled our demurrer. We sought a writ from the California State Court of Appeal for the Sixth District to direct the lower court to reverse its decision, but the petition for the writ was denied. In April 2008, we filed a motion for summary judgment in the California Superior Court which was denied. In October 2008, a motion filed by RPC for summary judgment in the California Superior Court was denied. A trial in the California Superior Court commenced in February 2009. On June 11, 2009, the superior court issued a tentative decision that concluded RPC is a partner in the Hellyer LP and is entitled to distribution of profits of the Hellyer LP in accordance with its percentage interest together with pre-judgment interest on each distribution from the d ate it was due and payable. On September 17, 2009, the superior court issued a final decision and entry of judgment in favor of RPC in the amount of approximately $6.6 million, together with pre-judgment interest of 10% through September 3, 2009 in the sum of approximately $2.7 million, for a total of approximately $9.3 million. As a result, we recorded an additional $0.5 million in interest expense. We filed an appeal following the court’s issuance of a final decision and entry of judgment. A motion for new trial is pending. On October 5, 2009, we deposited with the clerk of the Santa Clara County Superior Court a check in the amount of approximately $14.0 million, of which approximately $4.7 million, or 50% of $9.3 million, was a deposit to appeal the court’s final decision. The additional $4.7 million appeal deposit is refundable regardless of the outcome of the appeal process. Pending the outcome of the appeal, we have accrued approximately $3.0 million in interest payable on the amount of pa st distributions that would be payable to RPC by Hellyer LP based on the judgment determined at the legal rate of interest of 10%. In addition, we have accrued approximately $1.0 million in interest receivable due from Berg & Berg Enterprises, Inc. because past distributions with respect to RPC’s interest in Hellyer LP were paid to Berg & Berg Enterprises, Inc. which interest income accrual was calculated at an interest rate of LIBOR plus 1.25%.

For additional information about this litigation and the underlying transactions you should refer to Part II “Item 8. – Notes to Consolidated Financial Statements – Notes 13 and 16.”

The Independent Directors Committee of the Board of Directors has exercised the right to acquire on behalf of the Company the former RPC interest and related distributions from Berg & Berg Enterprises, Inc. under the terms of the Berg Land Holdings Option Agreement between the Company and the Berg Group if the litigation is ultimately decided in favor of the Company, as more fully explained under Item 8, “Financial Statements and Supplementary Data - Note 13.”

Item 4. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Historical Performance Comparison

The following graph compares the change in the Company’s cumulative stockholder return on its shares of common stock to the cumulative total return of the NAREIT Equity REIT Total Return Index (“NAREIT Equity Index”) and the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) from December 31, 2004 to December 31, 2009. The line graph starts December 31, 2004. The graph assumes that the value of the investment in the Company’s common stock was $100 at December 31, 2004 and that all dividends were reinvested. The common stock’s price on December 31, 2004 was $10.64. The Company obtained the information about the NAREIT Equity Index and S&P 500 Index from each entity respectively, and has assumed that the information is reliable, but cannot assume its accuracy. The return shown on the graph is not necessarily indicative of future performance.

The stock price performance shown in the graph is not necessarily indicative of future performance of the Company’s common stock.

Our common stock is listed on the Nasdaq Stock Market, LLC (“NASDAQ”) and trades under the symbol “MSW.” The closing price of our common stock on December 31, 2009, the last trading day of the year, was $7.19 per share. The high and low closing price per share of common stock as reported on NASDAQ during each quarter of 2009 and 2008 were as follows:

	2009				2008
	High		Low		High		Low
1st Quarter	$	7.66	$	5.60	$	10.13	$	8.36
2nd Quarter	$	7.17	$	6.21	$	12.39	$	9.45
3rd Quarter	$	7.07	$	6.40	$	11.36	$	8.58
4th Quarter	$	7.31	$	6.39	$	9.27	$	6.11

On February 28, 2010, there were 157 registered holders of the Company’s common stock.

Dividend Policy

We declared and paid dividends in each quarter of 2009 and 2008. We expect to pay quarterly dividends in 2010. The following tables show information for quarterly dividends for 2009 and 2008.

	2009
	Record Date	Payment Date	Dividend Per Share
1st Quarter	03/31/09	04/09/09	$	0.20
2nd Quarter	06/30/09	07/09/09		0.15
3rd Quarter	09/30/09	10/08/09		0.15
4th Quarter	12/31/09	01/07/10		0.15
Total			$	0.65

	2008
	Record Date	Payment Date	Dividend Per Share
1st Quarter	03/31/08	04/03/08	$	0.20
2nd Quarter	06/30/08	07/03/08		0.20
3rd Quarter	09/30/08	10/09/08		0.20
4th Quarter	12/31/08	01/08/09		0.20
Total			$	0.80

The declaration and payment of dividends and distributions will continue to be determined by the Board of Directors in light of conditions then existing, including the Company’s earnings, financial condition, capital requirements, debt service requirements and other factors.

For federal income tax purposes, we have characterized the dividends declared in 2009 as follows: 93.4% taxable ordinary income and 6.6% return of capital (unaudited). For 2008, we have characterized 73.3% taxable ordinary income, 22.2% capital gain and 4.5% unrecaptured section 1250 gain (unaudited).

Securities Authorized for Issuance under Equity Compensation Plans

See Item 12 of Part III of this Report regarding information about securities authorized for issuance under our equity compensation plans.

Item 6. Selected Financial Data

The following table sets forth selected historical financial information for Mission West Properties, Inc. (see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview and Background” for discussion of business combinations and property dispositions that materially affect the comparability of the selected financial data).

Selected consolidated financial data is derived from the audited financial statements and notes thereto (see Item 8, “Financial Statements and Supplementary Data”) and is as follows:

	Year Ended December 31,
	2009			2008			2007			2006			2005
	(dollars in thousands, except per share data)
OPERATING INFORMATION: (1)
Operating revenues:
Rental income	$	82,520		$	79,075		$	80,337		$	91,457		$	99,082
Above market lease intangible asset amortization		-			-			(4,091	)		(1,888	)		(1,888	)
Tenant reimbursements		18,732			16,406			13,355			13,061			14,030
Other income, including lease terminations and settlements		3,756			4,223			61,982			18,222			4,023
Total operating revenues		105,008			99,704			151,583			120,852			115,247

Operating expenses:
Property operating, maintenance and real estate taxes		27,860			23,460			20,371			18,505			18,613
General and administrative		2,336			2,635			3,035			2,248			1,910
Depreciation and amortization		24,110			23,224			22,588			21,579			20,329
Total operating expenses		54,306			49,319			45,994			42,332			40,852

Operating income		50,702			50,385			105,589			78,520			74,395

Other income (expenses):
Equity in earnings of unconsolidated joint venture		309			19,617			1,408			1,985			724
Interest and dividend income		1,309			1,735			3,086			2,344			567
Unrealized gain (loss) from investment		5,011			(278	)		-			-			-
Interest expense		(22,117	)		(19,787	)		(20,131	)		(20,708	)		(21,294	)
Interest expense – related parties		(765	)		(1,332	)		(724	)		(755	)		(972	)
Income from continuing operations		34,449			50,340			89,228			61,386			53,420

Discontinued operations:
Net gain on disposal of discontinued operations (2)		-			-			6,529			18,102			2,206
Net income attributable to discontinued operations (2)		-			-			91			1,500			1,925
Income from discontinued operations		-			-			6,620			19,602			4,131

Net income		34,449			50,340			95,848			80,988			57,551
Net income attributable to noncontrolling interests		(26,058	)		(40,206	)		(76,960	)		(66,358	)		(47,524	)
Net income available to common stockholders	$	8,391		$	10,134		$	18,888		$	14,630		$	10,027

Basic net income per share from continuing operations	$	0.39		$	0.51		$	0.90		$	0.60		$	0.51
Diluted net income per share from continuing operations	$	0.38		$	0.51		$	0.89		$	0.59		$	0.51

Basic net income per share from discontinued operations		-			-		$	0.06		$	0.17		$	0.04
Diluted net income per share from discontinued operations		-			-		$	0.06		$	0.17		$	0.04

Basic net income per share to common stockholders	$	0.39		$	0.51		$	0.96		$	0.77		$	0.55
Diluted net income per share to common stockholders	$	0.38		$	0.51		$	0.95		$	0.76		$	0.55

PROPERTY AND OTHER INFORMATION:
Total properties, end of period (3)		111			111			109			107			107
Total rentable square feet, end of period (000’s)		8,048			8,048			7,862			7,701			7,780
Average monthly rental income per square foot (4)	$	1.30		$	1.25		$	1.42		$	1.57		$	1.58
Occupancy for leased properties, end of period		66	%		66	%		62	%		69	%		69	%

Dividends per share to common stockholders	$	0.65		$	0.80		$	0.64		$	0.64		$	0.64

Funds from operations (5)	$	60,467		$	55,334		$	114,867		$	86,585		$	79,152
Funds from operations per share (5) (6)	$	0.57		$	0.52		$	1.09		$	0.83		$	0.76

CASH FLOW INFORMATION:
Cash flows provided by operating activities	$	56,072		$	76,872		$	78,814		$	82,630		$	69,422
Cash flows used in investing activities	$	(278	)	$	(26,496	)	$	(8,548	)	$	(5,369	)	$	(2,875	)
Cash flows (used in) provided by financing activities	$	(54,808	)	$	(74,067	)	$	(80,360	)	$	(74,917	)	$	31,441



	December 31,
		2009		2008		2007		2006		2005
	(dollars in thousands)
BALANCE SHEET INFORMATION:
Net investments in properties	$	919,647	$	943,579	$	922,117	$	898,889	$	927,381
Total assets	$	986,389	$	1,034,285	$	1,053,885	$	1,027,487	$	1,023,377
Mortgage notes payable	$	318,818	$	330,908	$	337,520	$	348,101	$	357,481
Mortgage note payable – related parties	$	8,261	$	8,761	$	9,224	$	9,654	$	10,051
Note payable – related parties	$	9,325		-		-		-		-
Revolving line of credit	$	14,466	$	13,079		-		-		-
Total liabilities	$	389,260	$	402,382	$	388,581	$	397,327	$	407,680
Stockholders’ equity attributable to Mission West Properties, Inc.	$	144,844	$	134,418	$	138,678	$	128,878	$	115,015
Noncontrolling interests in operating partnerships	$	452,285	$	497,485	$	526,626	$	501,282	$	500,682
Common stock outstanding		21,870,211		19,748,211		19,664,087		19,443,587		18,448,791
O.P. Units issued and outstanding		83,404,965		85,526,965		85,533,935		85,206,199		86,088,095

(1)	Certain reclassifications have been made to prior period amounts in order to conform to current period presentation.

(2)	The operating results of real estate held for sale and sold are reported as discontinued operations for all years presented. Additionally, all gains and losses on the sale of assets classified as held for sale are included in discontinued operations.

(3)	As of December 31, 2009, 2008, 2007, 2006 and 2005, total properties include a property at 245 Caspian in Sunnyvale with no building. In 2001, we paid the Berg Group approximately $7.5 million for their commitment to complete an approximate 75,000 to 90,000 square foot building on the property.

(4)	Average monthly rental income per square foot has been determined by taking the total cash base rent for the period divided by the number of months in the period, and then divided by the average occupied square feet in the period.

(5)

Funds from Operations (“FFO”) is a non-GAAP financial term used by REITs to measure and compare operating performance. As defined by the National Association of Real Estate Investment Trusts (“NAREIT”), FFO represents net income (loss) (computed in accordance with GAAP), including non-recurring events other than “extraordinary items” under GAAP and excluding gains and losses from sales of discontinued operations or depreciable operating properties, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustments for unconsolidated partnerships and joint ventures. FFO does include impairment losses for properties held for sale and held for use. Additionally, our 2009, 2008, 2007, 2006 and 2005 FFO calculation i ncludes our portion of the depreciation and amortization of real estate from our unconsolidated joint venture, but excludes the above-market lease intangible asset, which was recorded as a reduction of revenues. Management considers FFO to be an appropriate supplemental measure of our operating and financial performance because when compared year over year, it reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, management believes that FFO provides useful information about our financial performance when compared to other REITs because FFO is generally recognized as the industry standard for reporting the operations of REITs. FFO should neither be considered as an alternative for neither net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP. FF O is not comparable to similarly entitled items reported by other REITs that do not define them exactly as we define FFO.

(6)	Considering the potential effect of all O.P. Units being exchanged for shares of our common stock.

Our definition of FFO also assumes conversion at the beginning of the period of all convertible securities, including O.P. Units represented by O.P. Units that may be exchanged for shares of common stock. Our FFO does not represent the amount available for management’s discretionary use; as such funds may be needed for capital replacement or expansion, debt service obligations or other commitments and uncertainties. Furthermore, FFO is not comparable to similarly entitled items reported by other REITs that do not define FFO exactly as we do.

A reconciliation of net income to FFO for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 follows:

	Year Ended December 31,
	2009			2008			2007			2006			2005
	(dollars in thousands, except per share data)
Net income	$	34,449		$	50,340		$	95,848		$	80,988		$	57,551
Add:
Depreciation and amortization (1)		26,425			25,833			26,050			24,636			24,286
Less:
Gain on sales of assets or joint venture assets		-			(20,471	)		(6,529	)		(18,540	)		(2,206	)
Noncontrolling interests of joint ventures		(407	)		(368	)		(502	)		(499	)		(479	)
FFO	$	60,467		$	55,334		$	114,867		$	86,585		$	79,152

Weighted average common shares and O.P. Units - diluted		105,461,581			105,524,677			105,016,651			104,809,155			104,545,776
FFO per common share and O.P. Unit - diluted	$	0.57		$	0.52		$	1.09		$	0.83		$	0.76

(1)

Also includes our portion of depreciation and amortization of real estate from our unconsolidated joint venture totaling approximately $238, $900, $757, $849 and $984 in 2009, 2008, 2007, 2006 and 2005, respectively, and amortization of leasing commissions totaling approximately $2,077, $1,709, $2,558, $1,513 and $1,703 in 2009, 2008, 2007, 2006 and 2005, respectively. Amortization of leasing commissions is included in the property operating, maintenance and real estate taxes line item in our consolidated statements of operations. (dollars in thousands)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion includes forward-looking statements, including, but not limited to, statements with respect to the future financial performance, operating results, plans and objectives of Mission West Properties, Inc. Actual results may differ materially from those currently anticipated depending upon a variety of factors, including those described in Part I – Item 1A, Risk Factors.

Overview and Background

Our original predecessor was formed in 1969 as Palomar Mortgage Investors, a California business trust, which operated as a mortgage REIT until 1979 when, under the name of Mission Investment Trust, it terminated its status as a REIT and began to develop and market its own properties. In 1982, Mission West Properties was incorporated as a successor to Mission Investment Trust. In 1997, our predecessor, Mission West Properties, sold all of its real estate assets and paid a special dividend of $9.00 per share to stockholders, after which it retained only nominal assets. Subsequently, the Berg Group acquired control of the corporation as a vehicle to acquire R&D properties, or interests in entities owning such properties, in a transaction completed on September 2, 1997. At that time the Berg Group and other investors acquired an agg regate 79.6% controlling ownership position. In May 1998, we, the Berg Group members, an independent limited partner, and certain other persons entered into an acquisition agreement providing, among other things, for our acquisition of interests as the sole general partner in the operating partnerships. At the time, the operating partnerships held approximately 4.34 million rentable square feet of R&D property located in Silicon Valley. The agreement also provided for the parties to enter into the Pending Projects Acquisition Agreement, the Berg Land Holdings Option Agreement and the Exchange Rights Agreement, following stockholder approval. Effective July 1, 1998, we consummated our acquisition of the general partner interests in the operating partnerships through the purchase of the general partner interests, and all limited partnership interests in the operating partnerships were converted into 59,479,633 O.P. Units, which represented ownership of approximately 87.89% of the operating partn erships. Our general partner interests represented the balance of the ownership of the operating partnerships. At December 31, 2009, we owned a 20.65% general partner interest in the operating partnerships, taken as a whole, on a weighted average basis.

Since the beginning of calendar year 1999, we have been taxed as a qualified REIT.

Our reincorporation under the laws of the State of Maryland through the merger of Mission West Properties into Mission West Properties, Inc. occurred on December 30, 1998, at which time all outstanding shares issued by our predecessor California corporation were converted into shares of our common stock on a one-for-one basis.

In July 1999, we completed a public offering of 8,680,000 shares of our common stock at $8.25 per share. The net proceeds of approximately $66.9 million, after deducting underwriting discounts and other offering costs, were used primarily to repay indebtedness.

We have grown through property acquisitions. Since September 1998, we have acquired a total of approximately 7.14 million rentable square feet of R&D buildings and vacant land under the Pending Project Acquisition Agreement, the Berg Land Holdings Option Agreement, and from unrelated third parties. The total cost of these properties was approximately $739.3 million. To acquire these properties, we paid cash or exchanged existing properties, issued a total of 28,510,261 O.P. Units and assumed debt totaling approximately $331.3 million.

Since 1998, we have sold a total of approximately 1.0 million rentable square feet of R&D buildings. The total sales price of these properties was approximately $144.2 million.

Almost all of our earnings and cash flow is derived from rental income received pursuant to leased R&D space at our properties. Key factors that affect our business and financial results include the following:

·	the current turmoil in the credit markets;

·	economic conditions generally and the real estate market specifically;

·	the occupancy rates of the properties;

·	rental rates on new and renewed leases;

·	tenant improvement and leasing costs incurred to obtain and retain tenants;

·	operating expenses;

·	cost and availability of capital;

·	interest rates;

·	the extent of acquisitions and sales of real estate;

·	legislative or regulatory provisions (including changes to laws governing the taxation of REITs);

·	competition;

·	supply of and demand for R&D, office and industrial properties in our current and proposed market areas;

·	tenant defaults and bankruptcies;

·	lease term expirations and renewals;

·	changes in general accounting principles, policies and guidelines applicable to REITs; and

·	ability to timely refinance maturing debt obligations and the terms of any such refinancing.

Negative effects from any of these factors could cause deterioration in our operating results, cash flows and financial condition.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires us to make certain estimates, judgments and assumptions that affect the reported amounts in the accompanying consolidated financial statements, disclosure of contingent assets and liabilities and related footnotes. Accounting and disclosure decisions with respect to material transactions that are subject to significant management judgments or estimates include impairment of long lived assets, deferred rent receivables, and allocation of purchase price relating to property acquisitions and the related depreciable lives assigned. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that require management to make estimates, judgments and assumptions, giving due consideration to materiality, in certain circumstances that affect amounts reported in the consolidated financial statements, and potentially result in materially different results under different conditions and assumptions. We believe that the following best describe our critical accounting policies:

Real Estate Assets

Real estate assets are stated at cost. Cost includes expenditures for improvements or replacements. Maintenance and repairs are charged to expense as incurred. Gains and losses from sales are included in income. The gain on the sale is only recognized proportionately as the seller receives payments from the purchaser. Interest income is recognized on an accrual basis, when appropriate.

Business Combinations

The acquisition costs of each property acquired prior to July 1, 2001 were allocated only to building, land and leasing commission with building depreciation being computed based on an estimated weighted average composite useful life of 40 years and leasing commission amortization being computed over the term of the lease. Acquisitions of properties made subsequent to July 1, 2001 are based on an allocation of the acquisition cost to land, building, tenant improvements, and intangibles for at market and above and below market in place leases, and the determination of their useful lives are guided by the accounting provision for business combinations and management’s estimates. Amortization of above and below market lease intangible asset is offset against rental income in the revenue section while amortization of in-place lease value intangible asset is included in depreciation and amortization of real estate in the expense section of our consolidated statements of operations. If we do not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of depreciation and amortization expense may not appropriately reflect the actual impact of these costs over future periods, which will affect net income.

Impairment of Long-Lived Assets

We review real estate assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds its estimated undiscounted net cash flow, before interest, we will recognize an impairment loss equal to the difference between its carrying amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and conditions, which are subject to varying mar ket factors, such as the vacancy rates, future rental rates and operating costs for R&D facilities in the Silicon Valley area and related submarkets. The analysis that we prepare in connection with determining if there may be any asset impairment loss considers several assumptions: holding period of ten years, 36 months lease up period and cap rate ranging from 8% to 9%. Therefore, it is reasonably possible that a change in these estimates resulting from judgments as to future events could occur which would affect the recorded amounts of the property and increase our operating expense.

Allowance for Deferred Rent and Doubtful Accounts

The preparation of the consolidated financial statements requires us to make estimates and assumptions. As such, we must make estimates of the uncollectability of our accounts receivable based on the evaluation of our tenants’ financial position, analyses of accounts receivable and current economic trends. We also make estimates for a straight-line adjustment reserve for existing tenants with the potential of early termination, bankruptcy or ceasing operations. Our estimates are based on our review of tenants’ payment histories, the remaining lease term, whether or not the tenant is currently occupying our building, publicly available financial information and such additional information about their financial condition as tenants provide to us. The information available to us might lead us to overstate or understate these reserve amounts. The use of different estimates or assumptions could produce different results. Moreover, actual future collections of accounts receivable or reductions in future reported rental income due to tenant bankruptcies or other business failures could differ materially from our estimates.

Consolidation of Joint Ventures

We hold interests in consolidated joint ventures. We consolidate joint ventures when we exhibit financial or operational control. Control is determined using accounting standards related to the consolidation of joint ventures. We, through an operating partnership, own three properties that are in joint ventures of which we have controlling interests. We manage and operate all three properties. The recognition of these properties and their operating results are 100% reflected on our consolidated financial statements, with appropriate allocation to noncontrolling interests, because we have operational and financial control of the investments. We make judgments and assumptions about the estimated monthly payments made to our noncontrolling interest joint venture partners, which are reported with our periodic results of operations. Actua l results may differ from these estimates under different assumptions or conditions.

Investment in Unconsolidated Joint Venture

We hold interests in one unconsolidated joint venture. Control is determined using accounting standards related to the consolidation of variable interest entities. For joint ventures that are defined as variable interest entities, the primary beneficiary consolidates the entity. In instances where we are not the primary beneficiary, we do not consolidate the joint venture for financial purposes. We, through an operating partnership, have a 50% non-controlling limited partnership interest in one unconsolidated joint venture. This investment is not consolidated because we do not exercise significant control over major operating and financial decisions. We account for the joint venture using the equity method of accounting.

Under the equity method, investments in unconsolidated joint ventures are initially recognized in the balance sheet at cost and are subsequently adjusted to reflect our proportionate share of net earnings or losses of the joint venture, distributions received, contributions and certain other adjustments, as appropriate.

Consolidation of Variable Interest Entities

We consolidate all variable interest entities (“VIE”) in which we are deemed to be the primary beneficiary. As of December 31, 2009, we consolidated one VIE in the accompanying consolidated financial statements in connection with an assignment of a lease agreement with an unrelated party, M&M Real Estate Control & Restructuring, LLC (see Item 8, “Financial Statements and Supplementary Data – Note 7” for further discussion of this transaction).

Revenue Recognition

Rental income is recognized on the straight-line method of accounting required by GAAP under which contractual rent payment increases are recognized evenly over the lease term, regardless of when the rent payments are received by us. The difference between recognized rental income and rental cash receipts is recorded as “Deferred rent receivable” on the consolidated balance sheets.

Rental income is affected if existing tenants terminate or amend their leases. We try to identify tenants who may be likely to declare bankruptcy, cease operations or are likely to seek a negotiated settlement of their obligation. By anticipating these events in advance, we expect to take steps to minimize their impact on our reported results of operations through lease renegotiations, reserves against deferred rent receivable, and other appropriate measures. Our judgments and estimations about tenants’ capacity to continue to meet their lease obligations will affect the rental income recognized. Material differences may result in the amount and timing of our rental income for any period if we made different judgments or estimations.

Lease termination fees are recognized as other income when there is a signed termination letter agreement, all of the conditions of the agreement have been met, and when the tenant no longer has the right to occupy the property. These fees are paid by tenants who want to terminate their lease obligations before the end of the contractual term of the lease by agreement with us. We cannot predict or forecast the timing or amounts of future lease termination fees.

We recognize income from rent, tenant reimbursements and lease termination fees and other income once all of the following criteria are met:

·	the agreement has been fully executed and delivered;

·	services have been rendered;

·	the amount is fixed and determinable; and

·	collectability is reasonably assured.

With regard to critical accounting policies, where applicable, we have explained and discussed the criteria for identification and selection, methodology in application and impact on the financial statements with the Audit Committee of our Board of Directors, which has reviewed these policies.

Results of Operations

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

Rental Income

As of December 31, 2009 and 2008, through our controlling interests in the operating partnerships, we owned 111 R&D properties totaling approximately 8.0 million rentable square feet. We did not acquire any new properties in 2009.

The following table depicts the amounts of rental income from operations for the years ended December 31, 2009 and 2008 represented by our historical properties and the percentage of the total increase in rental income over the period that is represented by each group of properties.

	Year Ended December 31,
	2009		2008		$ Change		% Change
	(dollars in thousands)
Same Property (1)	$	81,209	$	77,982	$	3,227		4.1%
2008 Acquisitions (2)		1,311		1,093		218		19.9%
Total	$	82,520	$	79,075	$	3,445		4.4%

(1)	“Same Property” is defined as properties owned by us prior to 2008 that we still owned as of December 31, 2009.

(2)	Operating rental income for 2008 Acquisitions does not reflect a full 12 months of operations in 2008 because these properties were acquired at various times during the year.

For the year ended December 31, 2009, our rental income increased by approximately $3.4 million, or 4.4%. The $3.4 million increase in rental income resulted from new lease agreements entered into during the year ended December 31, 2009, as well as full year rental income from leases entered during the year ended December 31, 2008.

Our overall occupancy rate for leased properties at December 31, 2009 and 2008 was approximately 65.5% and 66.4%, respectively. According to the CTBT Report, the leased occupancy rate for R&D property in the Silicon Valley at December 31, 2009 was approximately 80.7%. Due to an over-supply of R&D properties, Silicon Valley landlords are bidding competitively for tenants and consequently, our occupancy rate may drop further in 2010 if we cannot renew or re-lease the approximately 217,000 rentable square feet scheduled to expire this year. The primary factors that have contributed to our low occupancy rate for several consecutive years have been the general downturn in the Silicon Valley’s economy, the softening of the R&D property market specifically, and the weaker relative performance of certain of our properties d ue to their location and the weak demand in those submarkets.

Other Income from Continuing Property Operations

The following table depicts the amounts of other income, including lease terminations and settlements, from operations for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(dollars in thousands)
Other income	$	3,756	$	4,223	$	(467	)		(11.1%	)

Other income of approximately $3.8 million for the year ended December 31, 2009 included approximately $2.0 million from the forfeiture of a purchase deposit under a contract for the sale of our McCandless properties, $1.0 million of management fees, $0.3 million from an insurance claim, $0.1 million from a lease settlement and $0.4 million of miscellaneous income. Other income of approximately $4.2 million for the year ended December 31, 2008 included approximately $3.0 million of lease termination fees, $1.0 million of management fees, and $0.2 million of miscellaneous income. Management fees are paid by tenants for our administration and supervision of the property. We do not consider termination fees and tenant bankruptcy settlements to be recurring items.

Expenses

The following table reflects the amounts of property operating and maintenance expenses and real estate taxes (“operating expenses”) from operations for the years ended December 31, 2009 and 2008 and the percentage of total increase in expenses over the period that is represented by each group of properties.

	Year Ended December 31,
	2009		2008		$ Change		% Change
	(dollars in thousands)
Same Property (1)	$	27,560	$	23,285	$	4,275		18.4%
2008 Acquisitions (2)		300		175		125		71.4%
Total	$	27,860	$	23,460	$	4,400		18.8%

(1)	“Same Property” is defined as properties owned by us prior to 2008 that we still owned as of December 31, 2009.

(2)	Operating expenses for 2008 Acquisitions do not reflect a full 12 months of operations in 2008 because these properties were acquired at various times during the year.

Operating expenses increased by approximately $4.4 million, or 18.8%, from $23.5 million for the year ended December 31, 2008 to $27.9 million for the year ended December 31, 2009 primarily due to higher real estate taxes and repair and maintenance costs. Tenant reimbursements from continuing operations increased by approximately $2.3 million, or 14.2%, from $16.4 million for the year ended December 31, 2008 to $18.7 million for the year ended December 31, 2009. The increase in tenant reimbursements resulted primarily from the increase in operating expenses. Total operating expenses exceeded tenant reimbursements because of vacancies which reached approximately 2.8 million rentable square feet by year-end 2009. Certain operating expenses such as property insurance, real estate taxes, and other fixed expenses are not recoverable from vacant properties. At December 31, 2009 our vacancy rate was approximately 34.5%.

The following table depicts the amounts of general and administrative expenses from operations for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(dollars in thousands)
General and administrative	$	2,336	$	2,635	$	(299	)		(11.3%	)

General and administrative expenses decreased by approximately ($0.3) million, or (11.3%), from $2.6 million for the year ended December 31, 2008 to $2.3 million for the year ended December 31, 2009. The decrease in general and administrative expenses was primarily a result of lower stock-based compensation expense and legal fees in 2009.

The following table depicts the amounts of depreciation and amortization expense from operations for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change		% Change
	(dollars in thousands)
Depreciation and amortization	$	24,110	$	23,224	$	886		3.8%

Depreciation and amortization expense increased by approximately $0.9 million, or 3.8%, primarily due to construction of new tenant improvements and the write-off of tenant improvements in connection with a lease termination.

Other Income and Expenses

The following table depicts the amounts of equity in earnings of unconsolidated joint venture from operations for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(dollars in thousands)
Equity in earnings of unconsolidated joint venture	$	309	$	19,617	$	(19,308	)		(98.4%	)

As of December 31, 2009, we had investments in one R&D building, totaling approximately 155,500 rentable square feet in Morgan Hill, California, through an unconsolidated joint venture with TBI, in which we acquired a 50% interest from the Berg Group in January 2003. We have a non-controlling limited partnership interest in this joint venture, which we account for using the equity method of accounting. For the years ended December 31, 2009 and 2008, equity in earnings from the unconsolidated joint venture was approximately $0.3 million and $19.6 million, respectively. Our equity in earnings from this unconsolidated joint venture decreased primarily due to a gain from the sale of two R&D properties in 2008. The occupancy rate for the remaining property owned by this joint venture at December 31, 2009 and 2008 was 100%.< /div>

The following table depicts the amounts of interest and dividend income from operations for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(dollars in thousands)
Interest and dividend income	$	1,309	$	1,735	$	(426	)		(24.6%	)

Interest and dividend income decreased by approximately ($0.4) million, or (24.6%), from $1.7 million for the year ended December 31, 2008 to $1.3 million for the year ended December 31, 2009. The decrease in interest and dividend income was primarily a result of lower cash balances and interest rates. For the year ended December 31, 2009, interest and dividend income totaled approximately $1.1 million and $0.2 million, respectively. For the year ended December 31, 2008, interest and dividend income totaled approximately $1.1 million and $0.6 million, respectively.

In 2009, we recorded an unrealized gain from investment in marketable securities of approximately $5.0 million. As of December 31, 2009, the fair value of the investment totaled approximately $12.1 million and our cost was approximately $6.6 million. In 2008, we recorded an unrealized loss from investment in marketable securities of approximately ($0.3) million. As of December 31, 2008, the fair value of the investment totaled approximately $3.3 million and our cost was approximately $3.6 million.

The following table depicts the amounts of interest expense from operations for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(dollars in thousands)
Interest	$	22,117	$	19,787	$	2,330			11.8%
Interest (related parties)		765		1,332		(567	)		(42.6%	)
Total	$	22,882	$	21,119	$	1,763			8.3%

Interest expense increased by approximately $2.3 million, or 11.8%, primarily due to approximately $2.4 million related to the Hellyer Avenue Limited Partnership litigation. Interest expense (related parties) decreased by approximately ($0.6) million, or (42.6%), due to lower interest rates in 2009.

Net Income to Common Stockholders and Net Income to Noncontrolling Interests

The following table depicts the amounts of earnings attributable to common stockholders and noncontrolling interests for the years ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(dollars in thousands)
Net income to common stockholders	$	8,391	$	10,134	$	(1,743	)		(17.2%	)
Net income to noncontrolling interests		26,058		40,206		(14,148	)		(35.2%	)
Total net income	$	34,449	$	50,340	$	(15,891	)		(31.6%	)

As of December 31, 2009 and 2008, we owned a controlling general partner interest of 24.31%, 21.85%, 16.31% and 12.52% and 20.02%, 21.85%, 16.31% and 12.52% in the four operating partnerships, Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III, respectively. We owned a 20.65% and 18.73% general partner interest in the operating partnerships, taken as a whole, on a consolidated weighted average basis as of December 31, 2009 and 2008, respectively. Net income available to common stockholders in 2009 decreased by approximately ($1.7) million, or (17.2%), from 2008. Net income attributable to noncontrolling interests in 2009 decreased by approximately ($14.1) million, or (35.2%), from 2008. The decrease in net income attributable to common stockholders and noncontrolling interests resulted primarily because net income in 2008 reflected gain from the sale of two R&D properties in our unconsolidated joint venture, TBI-MWP.

Noncontrolling interests represent the limited partners’ ownership interest of 79.35% and 81.27% in the operating partnerships, on a weighted average basis, as of December 31, 2009 and 2008, respectively.

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

Rental Income from Continuing Property Operations

As of December 31, 2008 and 2007, through our controlling interests in the operating partnerships, we owned 111 and 109 R&D properties totaling approximately 8.0 and 7.9 million rentable square feet, respectively. We acquired two R&D properties during 2008.

The following table depicts the amounts of rental income from continuing operations for the years ended December 31, 2008 and 2007 represented by our historical properties and the percentage of the total decrease in rental income over the period that is represented by each group of properties.

	Year Ended December 31,
	2008		2007		$ Change			% Change
	(dollars in thousands)
Same Property (1)	$	75,653	$	80,282	$	(4,629	)		(5.8%	)
2007 Acquisitions (2)		33		55		(22	)		(40%	)
2008 Acquisitions (3)		3,389		-		3,389			100%
Total	$	79,075	$	80,337	$	(1,262	)		(1.6%	)

(1)	“Same Property” is defined as properties owned by us prior to 2007 that we still owned as of December 31, 2008.

(2)	Operating rental income for 2007 Acquisitions does not reflect a full 12 months of operations in 2007 because these properties were acquired at various times during the year.

(3)	Operating rental income for 2008 Acquisitions does not reflect a full 12 months of operations in 2008 because these properties were acquired at various times during the year.

For the year ended December 31, 2008, our rental income decreased by approximately ($1.3) million, or (1.6%). Approximately $4.1 million of amortization expense with respect to above-market leases that we obtained through property acquisitions was offset against revenue for the year ended December 31, 2007. The ($1.3) million decrease in rental income resulted from current adverse market conditions as “Same Property” rents decreased due to lease terminations, cessation of tenant operations and tenant relocations since December 31, 2007.

Our overall occupancy rate for leased properties at December 31, 2008 and 2007 was approximately 66.4% and 61.7%, respectively. According to the CTBT Report, the leased occupancy rate for R&D property in the Silicon Valley at December 31, 2008 was approximately 83.7%. Factors that contributed to our low occupancy rate were primarily the general downturn in the Silicon Valley’s economy in recent years, the softening of the R&D property market specifically, as well as the weaker relative performance of certain properties due to their location and the weak demand in those submarkets.

Other Income from Continuing Property Operations

The following table depicts the amounts of other income, including lease terminations and settlements, from continuing operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change			% Change
	(dollars in thousands)
Other income	$	4,223	$	61,982	$	(57,759	)		(93.2%	)

Other income, including lease terminations and settlements, of approximately $4.2 million for the year ended December 31, 2008 included approximately $3.0 million of lease termination fees, $1.0 million of management fees, and $0.2 million of miscellaneous income. Other income, including lease terminations and settlements, of approximately $62.0 million for the year ended December 31, 2007 included approximately $57.5 million of lease termination fees, $1.8 million from security deposit forfeitures, $1.0 million of management fees, $0.3 million from tenant bankruptcy settlements and $1.4 million of miscellaneous income. In 2007, of the $57.5 million in lease termination fees, approximately $46 million was from the Ciena Corporation lease termination. Management fees are paid by the tenants to the landlord for the administration and s upervision of the property. We do not consider termination fees and tenant bankruptcy settlements to be recurring items.

Expenses from Continuing Property Operations

The following table reflects the amounts of property operating and maintenance expenses and real estate taxes (“operating expenses”) from continuing operations for the years ended December 31, 2008 and 2007 and the percentage of total increase in expenses over the period that is represented by each group of properties.

	Year Ended December 31,
	2008		2007		$ Change		% Change
	(dollars in thousands)
Same Property (1)	$	22,657	$	20,107	$	2,550		12.7%
2007 Acquisitions (2)		403		264		139		52.7%
2008 Acquisitions (3)		400		-		400		100%
Total	$	23,460	$	20,371	$	3,089		15.2%

(1)	“Same Property” is defined as properties owned by us prior to 2007 that we still owned as of December 31, 2008.

(2)	Operating expenses for 2007 Acquisitions do not reflect a full 12 months of operations in 2007 because these properties were acquired at various times during the year.

(3)	Operating expenses for 2008 Acquisitions do not reflect a full 12 months of operations in 2008 because these properties were acquired at various times during the year.

Operating expenses from continuing operations increased by approximately $3.1 million, or 15.2%, from $20.4 million for the year ended December 31, 2007 to $23.5 million for the year ended December 31, 2008 primarily due to higher real estate taxes, repair and maintenance costs and utility rates. Tenant reimbursements from continuing operations increased by approximately $3.0 million, or 22.8%, from $13.4 million for the year ended December 31, 2007 to $16.4 million for the year ended December 31, 2008. The increase in tenant reimbursements resulted primarily from the increase in operating expenses. Total operating expenses exceeded tenant reimbursements because of vacancies which reached approximately 2.7 million rentable square feet by year-end 2008. Certain operating expenses such as property insurance, real estate taxes, and othe r fixed expenses are not recoverable from vacant properties. At December 31, 2008 our vacancy rate was approximately 34%.

The following table depicts the amounts of general and administrative expenses from operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change		% Change
	(dollars in thousands)
General and administrative	$	2,635	$	3,035	$	400		(13.2%	)

General and administrative expenses decreased by approximately ($0.4) million, or (13.2%), from $3.0 million for the year ended December 31, 2007 to $2.6 million for the year ended December 31, 2008. The decrease in general and administrative expenses was primarily a result of higher legal fees associated with a potential acquisition of the Company in 2007 that did not recur in 2008.

The following table depicts the amounts of depreciation and amortization expense of real estate from continuing operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change		% Change
	(dollars in thousands)
Depreciation and amortization	$	23,224	$	22,588	$	636		2.8%

Depreciation and amortization expense of real estate from continuing operations increased by approximately $0.6 million, or 2.8%, primarily due to two property acquisitions, construction of new tenant improvements and the write-off of tenant improvements in connection with a lease termination.

Other Income and Expenses

The following table depicts the amounts of equity in earnings of unconsolidated joint venture from operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change		% Change
	(dollars in thousands)
Equity in earnings of unconsolidated joint venture	$	19,617	$	1,408	$	18,209		1,293.3%

As of December 31, 2008, we had investments in one R&D building, totaling approximately 155,500 rentable square feet in Morgan Hill, California, through an unconsolidated joint venture with TBI, in which we acquired a 50% interest from the Berg Group in January 2003. We have a non-controlling limited partnership interest in this joint venture, which we account for using the equity method of accounting. For the years ended December 31, 2008 and 2007, equity in earnings from the unconsolidated joint venture was approximately $19.6 million and $1.4 million, respectively. Our equity in earnings from this unconsolidated joint venture increased primarily due to a gain from the sale of two R&D properties in 2008. The occupancy rate for the properties owned by this joint venture at December 31, 2008 and 2007 was 100%.

The following table depicts the amounts of interest and dividend income from operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change			% Change
	(dollars in thousands)
Interest and dividend income	$	1,735	$	3,086	$	(1,351	)		(43.8%	)

Interest and dividend income decreased by approximately ($1.4) million, or (43.8%), from $3.1 million for the year ended December 31, 2007 to $1.7 million for the year ended December 31, 2008. The decrease in interest and dividend income was primarily a result of lower cash balance and interest rates. For the year ended December 31, 2008, interest and dividend income totaled approximately $1.1 million and $0.6 million, respectively. For the year ended December 31, 2007, interest income totaled approximately $3.1 million.

In 2008, we recorded an unrealized loss from investment in marketable securities of approximately ($0.3) million. As of December 31, 2008, the fair value of the investment totaled approximately $3.3 million and our cost was approximately $3.6 million.

The following table depicts the amounts of interest expense from operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change			% Change
	(dollars in thousands)
Interest	$	19,787	$	20,131	$	(344	)		(1.7%	)
Interest (related parties)		1,332		724		608			84%
Total	$	21,119	$	20,855	$	264			1.3%

Interest expense decreased by approximately ($0.3) million, or (1.7%). Interest expense (related parties) increased by approximately $0.6 million, or 84.0%, due to short-term notes payable issued to the Berg Group in connection with quarterly dividend distributions. As of December 31, 2008, the short-term notes payable were paid off in full.

Discontinued Operations

The following table depicts the amounts of income from discontinued operations for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007
	(dollars in thousands)
Net gain on disposal of discontinued operations		-	$	6,529
Net income attributable to discontinued operations		-		91
Income from discontinued operations		-	$	6,620

In 2007, we sold two R&D properties and classified the net gains on sale and operating results of the disposed properties as discontinued operations. Prior period results of operations for these properties were retrospectively adjusted and presented in discontinued operations in prior consolidated statements of operations.

Net Income to Common Stockholders and Net Income to Noncontrolling Interests

The following table depicts the amounts of earnings attributable to common stockholders and noncontrolling interests for the years ended December 31, 2008 and 2007.

	Year Ended December 31,
	2008		2007		$ Change			% Change
	(dollars in thousands)
Net income to common stockholders	$	10,134	$	18,888	$	(8,754	)		(46.3%	)
Net income to noncontrolling interests		40,206		76,960		(36,754	)		(47.8%	)
Total net income	$	50,340	$	95,848	$	(45,508	)		(47.5%	)

As of December 31, 2008 and 2007, we owned a controlling general partner interest of 20.02%, 21.85%, 16.31% and 12.52% and 19.94%, 21.78%, 16.26% and 12.48% in the four operating partnerships, Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III, respectively. We owned an 18.73% general partner interest in the operating partnerships, taken as a whole, on a consolidated weighted average basis as of December 31, 2008 and 2007. Net income available to common stockholders in 2008 decreased by approximately ($8.8) million, or (46.3%), from 2007. Our net income attributable to noncontrolling interests in 2008 decreased by approximately ($36.8) million, or (47.8%), from December 31, 2007. The decrease in net income attributable to common stockholders and noncontrolling interests resulted primarily due to lower lease termination income and higher operating expenses described above.

Noncontrolling interests represent the limited partners’ ownership interest of 81.27% in the operating partnerships, on a weighted average basis, as of December 31, 2008 and 2007.

Changes in Financial Condition

Year Ended December 31, 2009

The most significant changes in our financial condition in 2009 resulted from the exchange of O.P. Units for shares of our common stock.

Debt outstanding, including amounts due related parties, decreased by approximately ($1.9) million, or (0.5%), from $352.7 million as of December 31, 2008 to $350.9 million as of December 31, 2009. During 2009, we borrowed from the Berg Group and our revolving line of credit and made recurring scheduled debt payments.

In 2009, two limited partners exchanged a total of 2,122,000 O.P. Units for 2,122,000 shares of our common stock pursuant to the Exchange Rights Agreement resulting in a reclassification of approximately $15.8 million from noncontrolling interests to additional paid-in-capital.

The conversion of O.P. Units to shares of our common stock was applied to increase our percentage interest as general partner in the operating partnerships.

Year Ended December 31, 2008

The most significant changes in our financial condition in 2008 resulted from the acquisition of two R&D properties, the exercise of stock options and the exchange of O.P. Units for shares of our common stock.

During 2008, we acquired two R&D properties representing approximately 186,000 rentable square feet for an aggregate gross purchase price of approximately $35.8 million. We acquired one R&D property in a tax-deferred exchange transaction plus cash and paid cash to members of the Berg Group to acquire the second R&D property.

Debt outstanding, including amounts due related parties, increased by approximately $6.0 million, or 1.7%, from $346.7 million as of December 31, 2007 to $352.7 million as of December 31, 2008. During 2008, we repaid the remaining balance on the Prudential loan with proceeds from the $115 million Hartford loan, borrowed from the Berg Group and our revolving line of credit and made recurring scheduled debt payments.

During the year ended December 31, 2008, stock options to purchase 70,487 shares of our common stock were exercised at $10.00 per share and stock options to purchase 6,667 shares of our common stock were exercised at $9.51 per share. The total proceeds of approximately $0.8 million increased additional paid-in-capital.

In 2008, three limited partners exchanged a total of 6,970 O.P. Units for 6,970 shares of our common stock pursuant to the Exchange Rights Agreement resulting in a reclassification of approximately $0.07 million from noncontrolling interests to additional paid-in-capital.

The conversion of O.P. Units to shares of our common stock was applied to increase our percentage interest as general partner in the operating partnerships.

Liquidity and Capital Resources

In 2010, we anticipate operating cash flows from our property portfolio to be lower compared with 2009. We are still experiencing weak demand for our R&D properties in certain areas of the Silicon Valley, principally the south San Jose area. If we are unable to lease a significant portion of the approximately 217,000 rentable square feet scheduled to expire in 2010, as well as our currently available space, our operating cash flows will be affected adversely. We are also subject to risks of decreased occupancy through tenant defaults and bankruptcies, and potential reduction in rental rates upon renewal of properties, which would result in reduction in cash flows from operations beyond the level we are anticipating currently.

We expect our principal source of liquidity for distributions to stockholders and O.P. Unit holders (noncontrolling interests), debt service, leasing costs, capital expenditures and tenant improvement to come from net cash flow provided by operations and borrowings from our credit facility and other sources of financing, as required. We expect these sources of liquidity to be adequate to meet projected distributions to stockholders and other presently anticipated liquidity requirements in 2010. We expect to meet our long-term liquidity requirements for the funding of property development, property acquisitions and other material non-recurring capital improvements through cash and investments, long-term secured and unsecured indebtedness and the issuance of additional equity securities by us. We have the ability to meet short-term obl igations or other liquidity needs based on our existing cash reserves. In 2010, we will be obligated to make payments totaling approximately $22.7 million of debt principal under our existing mortgage notes without regard to any debt refinancing or new debt obligations that we might incur, or optional payments of debt principal.

The cost and availability of credit have been adversely affected by the continuing state of the capital and commercial lending markets. We continue to evaluate sources of financing for our business activities, including borrowings under the credit facility and fixed-rate secured mortgage financing. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be impacted by various factors including the continuing recessionary conditions, significant tenant defaults, a further decline in the demand for R&D/office properties, and a decrease in market rental rates or market values of real estate assets in our submarkets.

On March 4, 2008, we established a $10 million uncollateralized revolving line of credit with Heritage Bank of Commerce (“HBC”). We paid approximately $26,000 in loan and legal fees. On April 17, 2008, we entered into a change in terms agreement with HBC that increased the facility from $10 million to $17.5 million. On October 13, 2009, we entered into a change in terms agreement with HBC to amend the maturity date to September 15, 2011. The interest rate on the revolving line of credit is the greater of LIBOR plus 1.75% or 4.00% per annum. We paid approximately $23,000 in loan and legal fees for the renewal of the loan. The HBC revolving line of credit is secured by three properties consisting of approximately 0.2 million rentable square feet and contains certain customary covenants as defined in the loan agree ment. The proceeds from the HBC revolving line of credit may be used to repay debt, complete acquisitions, pay dividends and distributions and finance other working capital requirements.

In 2009, we issued multiple notes in the aggregate amount of $22 million to M&M Real Estate Control & Restructuring, LLC for funds borrowed from restricted cash. The notes bear interest at LIBOR plus 2% and are due December 31, 2010. The proceeds were used to pay outstanding short-term notes issued to the Berg Group and for general corporate purposes. This cash is required to be paid to us in any event between now and December 2011 under the terms of the lease termination and assumption agreements with M&M Real Estate Control & Restructuring, LLC and the former tenant under the lease.

As of December 31, 2009, we were in compliance with loan covenants relating to the Allianz, Hartford, Northwestern mortgage loans and the HBC revolving line of credit.

Cash and cash equivalents increased by approximately $1.0 million from $0 as of December 31, 2008 to $1.0 million as of December 31, 2009.

Restricted cash totaled approximately $0.2 million as of December 31, 2009 (see Item 8, “Financial Statements and Supplementary Data – Note 7” for further discussion of restricted cash). Of this amount, $0.1 million represents a balance we have consolidated due to the accounting provision for variable interest entity. We do not possess or control these funds or have any rights to receive them except as provided in the applicable agreements. Therefore, restricted cash is not available for distribution to stockholders. The balance of restricted cash is a $0.1 million deposit for a property purchase offer.

Since 1999, we have elected to be taxed as a REIT under the Internal Revenue Code of 1986. We intend to continue operating as a REIT in 2010. As a REIT, we are subject to a number of organizational and operating requirements, including a requirement to distribute 90% of our taxable income to our stockholders. Also as a REIT, we generally will not be subject to federal income taxes on our taxable income.

Generally, our objective is to meet our short-term liquidity requirement of funding the payment of our current level of quarterly common dividends to stockholders and O.P. Unit holders through our net cash flows provided by operating activities, borrowings from the Berg Group and borrowings from our credit facility, less our recurring and nonrecurring property capital expenditures. These operating capital expenditures are the capital expenditures necessary to maintain the earnings capacity of our operating assets over time.

For 2010, we expect to maintain our quarterly dividend payment at the current rate of $0.15 per share to common stockholders and O.P. Unit holders and fund it with net cash flow provided by operations and borrowings from our credit facility and other sources of financing, as required. However, distributions are declared at the discretion of our Board of Directors and are subject to actual cash available for distribution, our financial condition, capital requirements and such other factors, as our Board of Directors deems relevant (see Item 1A, “Risk Factors - Stockholders are not assured of receiving cash distributions from us”).

On January 7, 2010, we paid dividends of $0.15 per share of common stock to all common stockholders of record as of December 31, 2009. On the same date, the operating partnerships paid a distribution of $0.15 per O.P. Unit to all holders of O.P. Units, with the exception of the Berg Group. A short-term note payable, which bears interest at LIBOR plus 1.75%, in the aggregate amount of approximately $20.8 million was issued to the Berg Group in connection with the fourth quarter 2009 dividend distributions and the loan amount outstanding at December 31, 2009. Aggregate dividends and distributions for the quarter ended December 31, 2009 amounted to approximately $15.8 million.

Funds available for distributions does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash needs. The actual return that we will realize and the amount available for distributions to stockholders will be affected by a number of factors, including the revenues received from our properties, our operating expenses, debt service on borrowings, and planned and unanticipated capital expenditures.

We anticipate that cash available for distribution will exceed earnings and profits for federal income tax purposes, as the latter figure takes into account non-cash expenses such as depreciation and amortization that we will incur. Distributions other than capital gain distributions by us to the extent of our current and accumulated earnings and profits for federal income tax purposes most likely will be taxable to U.S. stockholders as ordinary dividend income unless a stockholder is a tax-exempt entity. Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of the U.S. stockholder’s basis in the common stock to the extent of such basis, and thereafter as taxable gain. The percentage of such distributions in excess of earnings and profits, if any, may vary from period to period.

Contractual Obligations

The following table identifies the contractual obligations with respect to the maturities and scheduled principal repayments of our secured debt, note, credit facility and scheduled interest payments of our fixed-rate and variable-rate debt at December 31, 2009 and provides information about our operating lease obligations that will impact our liquidity and cash flow in future periods.

	2010		2011		2012		2013		2014		Thereafter		Total
Principal payments (1)	$	22,653	$	28,575	$	14,935	$	81,269	$	10,891	$	192,547	$	350,870
Interest payments-fixed rate debt (2)		18,433		17,652		16,825		12,820		11,366		62,288		139,384
Interest payments-variable rate debt (3)		809		-		-		-		-		-		809
Operating lease obligations (4)		120		30		-		-		-		-		150
Total	$	42,015	$	46,257	$	31,760	$	94,089	$	22,257	$	254,835	$	491,213

(1)	As of December 31, 2009, 93.2% of our debt was contractually fixed and 6.8% of our debt bore interest at variable rates. Our debt obligations are set forth in detail in the table below.

(2)	The information in the table above reflects our projected interest rate obligations for the fixed-rate payments based on the contractual interest rates, interest payment dates and scheduled maturity dates.

(3)	The information in the table above reflects our projected interest rate obligations for the variable-rate payments based on 4.00% and LIBOR plus a 1.75% spread at December 31, 2009, the scheduled interest payment dates and maturity dates.

(4)	Our operating lease obligations relate to a lease of our corporate office facility from a related party.

At December 31, 2009, we had total indebtedness of approximately $350.9 million. A table listing our indebtedness as of December 31, 2009 is set forth in Item 8, “Financial Statements and Supplementary Data – Note 8.”

At December 31, 2009, our debt to total market capitalization ratio, which is computed as our total debt outstanding divided by the sum of total debt outstanding plus the market value of common stock (based upon the closing price of $7.19 per share on December 31, 2009) on a fully diluted basis, including the conversion of all O.P. Units into common stock, was approximately 31.6%. On December 31, 2009, the last trading day for the year, total market capitalization was approximately $1.11 billion. By comparison, on December 31, 2008 total debt as a percentage of market capitalization was 30.4% and total market capitalization was approximately $1.16 billion.

At December 31, 2009, the outstanding balance remaining under certain demand notes that we owed to the operating partnerships was approximately $2.3 million. The due date of the demand notes has been extended to September 30, 2011. The principal of the demand notes, along with the interest expense, which is interest income to the operating partnerships, is eliminated in consolidation and is not included in the corresponding line items within the consolidated financial statements. However, the interest income earned by the operating partnerships, which is interest expense to us, in connection with this debt, is included in the calculation of noncontrolling interest as reported on the consolidated statements of opera tions, thereby reducing our net income by this same amount. At present, our only means for repayment of this debt is through distributions that we receive from the operating partnerships that are in excess of the amount of dividends to be paid to our stockholders or by raising additional equity capital.

Historical Cash Flows

Our cash flow activities are summarized as follows:

	Year Ended December 31,
	2009			2008			2007
	(dollars in thousands)
Cash flow provided by operating activities	$	56,072		$	76,872		$	78,814
Cash flow used in investing activities	$	(278	)	$	(26,496	)	$	(8,548	)
Cash flow used in financing activities	$	(54,808	)	$	(74,067	)	$	(80,360	)

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

Cash and cash equivalents were approximately $1.0 million at December 31, 2009 compared with $0 at December 31, 2008.

Net cash provided by operating activities for the year ended December 31, 2009 was approximately $56.1 million, compared with approximately $76.9 million for the year ended December 31, 2008. Cash provided by operating activities was higher in 2008 primarily because of a $16.9 million cash distribution received from our unconsolidated joint venture, TBI-MWP, from the sale of two R&D buildings. In addition, in 2009 we used operating cash flow to fund a $4.7 million deposit to appeal the court’s final decision in the RPC litigation and for higher leasing commission payments (included in other assets).

Cash used in investing primarily consists of property acquisitions, improvements to our properties and proceeds from investment in marketable securities. Net cash used in investing activities was approximately ($0.3) million for the year ended December 31, 2009 compared with approximately ($26.5) million for the year ended December 31, 2008. Net cash used in investing activities for the year ended December 31, 2009 related principally to capital expenditures relating to real estate improvements of approximately $0.2 million and approximately $0.1 million as a deposit for a property purchase offer. In 2008, we acquired two properties for approximately $35.8 million, incurred capital expenditures relating to real estate improvements of approximately $6.5 million and transferred excess restricted cash of approximately $7.7 million to ou r general cash account. We used restricted cash totaling approximately $8.1 million for the acquisition of one R&D property in a tax-deferred exchange transaction involving our former R&D property at Morse Avenue in Sunnyvale, California.

Net cash used in financing activities was approximately ($54.8) million for the year ended December 31, 2009 compared with approximately ($74.0) million for the year ended December 31, 2008. During 2009, financing activities included borrowing approximately $1.4 million under our line of credit, borrowing $22 million from M&M Real Estate Control & Restructuring, LLC through restricted cash, payments of approximately $12.6 million for outstanding debt, borrowing and repayment of approximately $39.4 million to the Berg Group to repay short-term loans, payments of approximately $14.8 million to common stockholders as dividends and payments of approximately $50.8 million to O.P. Unit holders as distributions. During 2008, financing activities included borrowing $115 million under a new collateralized mortgage loan, borrowing appr oximately $13.1 million under our line of credit, payments of approximately $122.1 million for outstanding debt, borrowing and repayment of approximately $19.4 million for the purchase of an R&D building, borrowing and repayment of $3.0 million under a short-term loan, payment of approximately $1.2 million in financing costs related to a new mortgage loan, refund of $1.5 million from a certificate of deposit related to a former loan escrow, receipt of approximately $0.8 million from stock option exercises, payments of approximately $15.0 million to common stockholders as dividends and payments of approximately $66.1 million to O.P. Unit holders as distributions.

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

Cash and cash equivalents were approximately $0 at December 31, 2008 compared with $23.7 million at December 31, 2007.

Net cash provided by operating activities for the year ended December 31, 2008 was approximately $76.9 million compared with approximately $78.8 million for the year ended December 31, 2007. The decrease in cash provided by operating activities resulted primarily from investing approximately $3.4 million in marketable securities.

Cash used in investing primarily consists of property acquisitions, improvements to our properties and investment in marketable securities. Net cash used in investing activities was approximately ($26.5) million for the year ended December 31, 2008 compared with approximately ($8.5) million for the year ended December 31, 2007. In 2008, we acquired two properties for approximately $35.8 million, incurred capital expenditures relating to real estate improvements of approximately $6.5 million and transferred excess restricted cash of approximately $7.7 million to our general cash account. We used restricted cash totaling approximately $8.1 million for the acquisition of one R&D property in a tax-deferred exchange transaction involving our former R&D property at Morse Avenue in Sunnyvale, California. In 2007, we acquired six pro perties for approximately $47.5 million, incurred capital expenditures relating to real estate improvements of approximately $4.9 million and transferred excess restricted cash of approximately $0.6 million to our general cash account. We used restricted cash totaling approximately $43.2 million for the acquisition of three R&D properties and 55 acres of vacant land in tax-deferred exchange transactions involving our former R&D properties at Samaritan Drive in San Jose, California. We sold two R&D properties for approximately $15.4 million, net, as described above, the proceeds of which were reflected on our consolidated balance sheet as restricted cash at December 31, 2007.

Net cash used in financing activities was approximately ($74.0) million for the year ended December 31, 2008 compared with approximately ($80.3) million for the year ended December 31, 2007. During 2008, financing activities included borrowing $115 million under a new collateralized mortgage loan, borrowing approximately $13.1 million under our line of credit, payments of approximately $122.1 million for outstanding debt, borrowing and repayment of approximately $19.4 million for the purchase of an R&D building, borrowing and repayment of $3.0 million under a short-term loan, payment of approximately $1.2 million in financing costs related to a new mortgage loan, refund of $1.5 million from a certificate of deposit related to a former loan escrow, receipt of approximately $0.8 million from stock option exercises, payments of appr oximately $15.0 million to common stockholders as dividends and payments of approximately $66.1 million to O.P. Unit holders as distributions. During 2007, financing activities included payments of approximately $11.0 million for outstanding debt, payment of approximately $1.5 million for a certificate of deposit related to a loan escrow, payments of approximately $12.5 million to common stockholders as dividends and payments of approximately $55.3 million to O.P. Unit holders as distributions.

Capital Expenditures

Our properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. For the years ended December 31, 2005 through December 31, 2009, the recurring tenant/building improvement costs and leasing commissions incurred with respect to new leases and lease renewals of the properties averaged approximately $5.9 million annually. We will have approximately 217,000 rentable square feet under expiring leases in 2010. We expect that the average cost of recurring tenant/building improvements and leasing commissions related to these properties will be approximately $3.0 million during 2010. We believe we will recover substantially all of these costs from the tenants under the new or renewed leases through contractual increases in rental rates. Until we actually sign the l eases, however, we cannot assure you that this will occur. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to be made to the properties. Tenant/building improvements and leasing costs also may fluctuate in any given period year depending upon factors such as the property, the term of the lease, the type of lease and the overall market conditions. We expect to meet our long-term liquidity requirements for the funding of property acquisitions and other material non-recurring capital improvements through our currently available sources of capital, including operating cash flows, cash on hand, and our credit facility (see “Policies with Respect to Certain Activities – Financing Policies” below).

Distribution Policy

Distributions are determined by our Board of Directors and depend on actual cash available for distributions, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. For a discussion of the risk that we will not meet our distribution objectives, see Item 1A, “Risk Factors – Stockholders are not assured of receiving cash distributions from us.”

Policies with Respect to Certain Activities

We have adopted policies with respect to investment, financing, conflicts of interest and other activities. These policies have been formulated by our Board of Directors, are set forth in our charter, bylaws, operating partnership agreements or agreements with the Berg Group, and generally may be amended or revised from time to time, subject to applicable agreement terms, at the discretion of the Board of Directors without a vote of the stockholders. Among other things, these policies provide that:

so long as the Berg Group members and their affiliates, other than us and the operating partnerships, beneficially own, in the aggregate, at least 15% of the outstanding shares of common stock on a Fully Diluted basis, the approval of a majority of our directors, including Carl E. Berg or his designee as a director, and of the holders of a majority of the O.P. Units is required for us to take title to assets, other than temporarily in connection with an acquisition prior to contributing such assets to the operating partnerships, or to conduct business other than through the operating partnerships, or for us or the operating partnerships to engage in any business other than the ownership, construction, development and operation of real estate properties, or for certain fundamental corporate actions, including amendments to our charter, bylaws or any op erating partnership agreement and any merger, consolidation or sale of all or substantially all of our assets or the assets of the operating partnerships;

·	changes in certain policies with respect to conflicts of interest must be consistent with legal requirements;

·	certain policies with respect to competition by and acquisitions from the Berg Group are imposed pursuant to provisions of the acquisition agreement that cannot be amended or waived without the approval of the Independent Directors Committee of our Board of Directors;

·	we cannot take any action intended to terminate our qualification as a REIT without the approval of more than 75% of the entire Board of Directors; and

·	we cannot undertake certain other specified transactions, including the issuance of debt securities, and borrowings in excess of specified limits, or the amendment of our charter and bylaws, without the approval of more than 75% of the entire Board of Directors.

Investment Policies

We expect to pursue our business and investment objectives principally through the direct ownership by the operating partnerships of our properties and future acquired properties. Development or investment activities are not limited to any specified percentage of our assets. We may also participate with other entities in property ownership, through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness that have priority over our equity interests.

While we will emphasize equity real estate investments, we may, in our discretion and subject to the percentage ownership limitations and gross income tests necessary for REIT qualification, invest in mortgage and other real estate interests, including securities of other real estate investment trusts. We have not previously invested in mortgages of other real estate investment trusts. As of December 31, 2009, we have invested approximately $6.6 million in securities of another real estate investment trust.

Financing Policies

To the extent that our Board of Directors determines to seek additional capital, we may raise such capital through additional equity offerings, debt financing or retention of cash flow, or through a combination of these sources, after consideration of provisions of the Code requiring the distribution by a REIT of a certain percentage of its taxable income and taking into account taxes that would be imposed on undistributed taxable income. It is our present intention that any additional borrowings will be made through the operating partnerships, although we may incur borrowings that would be re-loaned to the operating partnerships. Borrowings may be unsecured or may be secured by any or all of our assets, the operating partnerships or any existing or new property, and may have full or limited recourse to all or any portion of our asse ts, the operating partnerships or any existing or new property.

We have adopted a policy of maintaining a consolidated ratio of debt to total market capitalization, which includes for this purpose the market value of all shares of common stock for which outstanding O.P. Units are exchangeable, of less than 50%. This ratio may not be exceeded without the approval of more than 75% of our entire Board of Directors. We also may determine to finance acquisitions through the exchange of properties or the issuance of additional O.P. Units in the operating partnerships, shares of common stock or other securities.

In the event that the Board of Directors determines to raise additional equity capital, it has the authority, without stockholder approval, to issue additional shares of common stock, preferred stock or other capital stock, including securities senior to the common stock, in any manner and on such terms and for such consideration it deems appropriate, including in exchange for property. In the event that we issue any shares of common stock or securities convertible into or exchangeable or exercisable for, shares of common stock, subject to limited exceptions, such as the issuance of common stock pursuant to any stock incentive plan adopted by us or pursuant to limited partners’ exercise of the exchange rights or the put rights, the limited partners will have the right to purchase common stock or such securities in order to main tain their respective percentage interests in us on a Fully Diluted basis. If the Board of Directors determines that we will raise additional equity capital to fund investments by the operating partnerships, we will contribute such funds to the operating partnerships as a contribution to capital and purchase of additional units of general partner interest; however, holders of O.P. Units will have the right to participate in such funding on a pro rata basis. In the event that holders of O.P. Units sell their O.P. Units to us upon exercise of their put rights, we are authorized to raise the funds for such purchase by issuing additional shares of common stock. Alternatively, we may issue additional shares of common stock in exchange for the tendered O.P. Units.

Our Board of Directors also has the authority to cause the operating partnerships to issue additional O.P. Units in any manner and on such terms and for such consideration, as it deems appropriate, including in exchange for property. In the event that the operating partnerships issue new O.P. Units for cash, but not property, the limited partners holding O.P. Units in an operating partnership will have the right to purchase O.P. Units in order, and to the extent necessary, to maintain their respective percentage interests in that operating partnership. The new O.P. Units will be exchangeable for common stock pursuant to the exchange rights or may be tendered to us pursuant to the put rights.

Disposition Policies

From time to time we may dispose of properties in our portfolio, subject to the required approvals as set forth below. During the past five years we have sold vacant R&D properties that we did not believe were likely to earn the type of return on assets that we seek. We will continue to dispose of under-performing properties when we consider it appropriate.

A significant factor influencing our disposition policy is that the tax basis of the limited partners in the properties in the operating partnerships is substantially less than current fair market value. Accordingly, prior to the disposition of their O.P. Units, upon a disposition of any of the properties, a disproportionately large share of the gain for federal income tax purposes would be allocated to the limited partners.

In addition, the approval of a majority of our directors, including Carl E. Berg or his designee, will be required to sell all or substantially all of our assets. The consent of the holders of a majority of the O.P. Units will be required to effect a sale or sales of all, or substantially all, of the assets of any of the operating partnerships.

Impact of New Accounting Pronouncements

For discussion of recent accounting pronouncements, see Item 8, “Financial Statements and Supplementary Data – Note 2” to our consolidated financial statements included in this report.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We do not generally hold market risk sensitive instruments for trading purposes. We use fixed and variable rate debt to finance our operations. Our exposure to market risk for changes in interest rates relates primarily to our current variable rate debt and our future debt obligations. We are vulnerable to significant fluctuations of interest rates on our floating rate debt.

We manage our market risk by monitoring interest rates where we try to recognize the unpredictability of the financial markets and seek to reduce potentially adverse effects on the results of our operations. This takes frequent evaluation of available lending rates and examination of opportunities to reduce interest expense through new sources of debt financing. Several factors affecting the interest rate risk include governmental monetary and tax policies, domestic and international economics and other factors that are beyond our control. The following table provides information about the principal cash flows, weighted average interest rates, and expected maturity dates for debt outstanding as of December 31, 2009. The current terms of our outstanding debt are described in Item 8, “Financial Statements and Supplementary Data & #8211; Note 8.” For fixed rate debt, we estimate fair value by using discounted cash flow analyses based on borrowing rates for similar kinds of borrowing arrangements.

For fixed rate debt, the table presents the assumption that the outstanding principal balance at December 31, 2009 will be paid according to scheduled principal payments and that we will not prepay any of the outstanding principal balance.

For variable rate debt, the table presents the assumption that the outstanding principal balance at December 31, 2009 will be paid upon maturity.

	2010	2011	2012	2013	2014	Thereafter	Total	Fair Value
	(dollars in thousands)
Fixed Rate Debt:
Secured notes payable	$13,328	$14,109	$14,935	$81,269	$10,891	$192,547	$327,079	$318,375
Weighted average interest rate	5.74%	5.74%	5.74%	5.74%	5.74%	5.74%

Variable Rate Debt:
Unsecured debt	$9,325	-	-	-	-	-	$9,325	$9,325
Weighted average interest rate	1.98%	-	-	-	-	-

Secured debt	-	$14,466	-	-	-	-	$14,466	$14,466
Weighted average interest rate	-	4.00%	-	-	-	-

The fixed rate debt represented 93.2% and 96.3% and the variable rate debt represented 6.8% and 3.7% of all debt outstanding for the years ended December 31, 2009 and 2008, respectively.

All of our debt is denominated in United States dollars. The weighted average interest rate for the fixed rate debt was approximately 5.74% and 5.86% for the years ended December 31, 2009 and 2008, respectively. The increase in interest expense attributable to the average interest rate difference between 2009 and 2008 was approximately $1.8 million, which was a result of approximately $2.4 million related to the Hellyer Avenue Limited Partnership litigation.

The primary market risk we face is the risk of interest rate fluctuations. The Heritage Bank of Commerce revolving line of credit and note payable (related parties), which are tied to a LIBOR based interest rate, was approximately $23.8 million, or 6.8%, of the total $350.9 million of debt as of December 31, 2009. The interest rate on the Heritage Bank of Commerce revolving line of credit is the greater of LIBOR plus 1.75% or 4.00% per annum, which is currently at 4.00%. With a floating interest rate we could pay lower rates of interest in periods of decreasing interest rates and higher rates of interest in periods of increasing interest rates. As of December 31, 2009 and 2008, we did not have any derivative instruments.

The following discussion of market risk is based solely on a possible hypothetical change in future market conditions related to our variable rate debt. It includes “forward-looking statements” regarding market risk, but we are not forecasting the occurrence of these market changes. Based on the amount of variable debt outstanding as of December 31, 2009, a 1% increase or decrease in interest rates on our $23.8 million of floating rate debt would decrease or increase, respectively, annual earnings and cash flows by approximately $0.09 million (excludes the HBC line of credit since its interest rate is greater than LIBOR plus 1.75%), as a result of the increased or decreased interest expense associated with the change in rate, and would not have an impact on the fair value of the floating rate debt. This amount is determin ed by considering the impact of hypothetical interest rates on our borrowing cost. Due to the uncertainty of fluctuations in interest rates and the specific actions that might be taken by us to mitigate any such fluctuations and their possible effects, the foregoing sensitivity analysis assumes no changes on our financial structure.

Item 8. Financial Statements and Supplementary Data

MISSION WEST PROPERTIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Report of Independent Registered Public Accounting Firm	42
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	43
Consolidated Balance Sheets as of December 31, 2009 and 2008	44
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007	45
Consolidated Statements of Equity for the years ended December 31, 2009, 2008 and 2007	46
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	47
Notes to Consolidated Financial Statements	48
Supplemental Financial Information	71
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule	73
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2009	75
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2008	77

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Mission West Properties, Inc.

Cupertino, California

We have audited the accompanying consolidated balance sheets of Mission West Properties, Inc. (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mission West Properties, Inc. at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2010 expressed an unqualified opinion thereon.

\S\ Burr Pilger Mayer, Inc.

San Francisco, California

March 16, 2010

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

Board of Directors and Stockholders

Mission West Properties, Inc.

Cupertino, California

We have audited Mission West Properties, Inc.’s (the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect that transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization s of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Mission West Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mission West Properties, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2009, and the related financial statement schedules listed in the Index at Item 15(a), and our reports dated March 16, 2010 expressed an unqualified opinion thereon.

\S\ Burr Pilger Mayer, Inc.

San Francisco, California

March 16, 2010

MISSION WEST PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

ASSETS
	December 31,
	2009			2008
Investments in real estate:
Land	$	320,911		$	320,911
Buildings and improvements		799,649			799,471
Real estate related intangible assets		3,240			3,240
Total investments in properties		1,123,800			1,123,622
Accumulated depreciation and amortization		(204,153	)		(180,043	)
Net investments in properties		919,647			943,579
Investment in unconsolidated joint venture		3,828			3,768
Net investments in real estate		923,475			947,347

Cash and cash equivalents		986			-
Restricted cash		197			39,478
Restricted investment in marketable securities		12,069			-
Investment in marketable securities		-			3,368
Deferred rent receivables		18,711			17,841
Other assets, net		30,951			26,251
Total assets	$	986,389		$	1,034,285


LIABILITIES AND EQUITY

Liabilities:
Mortgage notes payable	$	318,818		$	330,908
Mortgage note payable (related parties)		8,261			8,761
Note payable (related parties)		9,325			-
Revolving line of credit		14,466			13,079
Interest payable		1,573			1,596
Security deposits		4,849			5,272
Deferred rental income		6,539			3,964
Dividends and distributions payable		15,791			21,055
Accounts payable and accrued expenses		9,638			17,747
Total liabilities		389,260			402,382

Commitments and contingencies (Note 16)

Equity:
Stockholders’ equity attributable to Mission West Properties, Inc.:
Preferred stock, $.001 par value, 20,000,000 shares authorized,
none issued or outstanding		-			-
Common stock, $.001 par value, 200,000,000 shares authorized, 21,870,211
and 19,748,211 shares issued and outstanding at December 31, 2009 and 2008		22			20
Additional paid-in capital		170,606			154,412
Distributions in excess of accumulated earnings		(25,784	)		(20,014	)
Total stockholders’ equity attributable to Mission West Properties, Inc.		144,844			134,418
Noncontrolling interests in operating partnerships		452,285			497,485
Total equity		597,129			631,903
Total liabilities and equity	$	986,389		$	1,034,285

See notes to consolidated financial statements.

MISSION WEST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

	Year Ended December 31,
	2009			2008			2007
Operating revenues:
Rental income	$	82,520		$	79,075		$	80,337
Above market lease intangible asset amortization		-			-			(4,091	)
Tenant reimbursements		18,732			16,406			13,355
Other income, including lease terminations and settlements		3,756			4,223			61,982
Total operating revenues		105,008			99,704			151,583

Operating expenses:
Property operating, maintenance and real estate taxes		27,860			23,460			20,371
General and administrative		2,336			2,635			3,035
Depreciation and amortization		24,110			23,224			22,588
Total operating expenses		54,306			49,319			45,994

Operating income		50,702			50,385			105,589

Other income (expenses):
Equity in earnings of unconsolidated joint venture		309			19,617			1,408
Interest and dividend income		1,309			1,735			3,086
Unrealized gain (loss) from investment in marketable securities		5,011			(278	)		-
Interest expense		(22,117	)		(19,787	)		(20,131	)
Interest expense – related parties		(765	)		(1,332	)		(724	)
Income from continuing operations		34,449			50,340			89,228

Discontinued operations:
Net gain on disposal of properties classified as discontinued operations		-			-			6,529
Net income attributable to discontinued operations		-			-			91
Income from discontinued operations		-			-			6,620

Net income		34,449			50,340			95,848
Net income attributable to noncontrolling interests		(26,058	)		(40,206	)		(76,960	)
Net income available to common stockholders	$	8,391		$	10,134		$	18,888

Net income per share from continuing operations:
Basic	$	0.39		$	0.51		$	0.90
Diluted	$	0.38		$	0.51		$	0.89
Net income per share from discontinued operations:
Basic		-			-		$	0.06
Diluted		-			-		$	0.06
Net income per share to common stockholders:
Basic	$	0.39		$	0.51		$	0.96
Diluted	$	0.38		$	0.51		$	0.95
Weighted average shares of common stock (basic)		21,736,699			19,714,414			19,627,234
Weighted average shares of common stock (diluted)		21,923,104			19,996,349			19,854,411
Weighted average O.P. units		83,538,477			85,528,329			85,162,240
Outstanding common stock		21,870,211			19,748,211			19,664,087
Outstanding O.P. units		83,404,965			85,526,965			85,533,935

See notes to consolidated financial statements.

MISSION WEST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(dollars in thousands, except per share data)



	Common Stock
	Number of Shares		Common Stock		Additional Paid-in Capital		Distributions in Excess of Accumulated Earnings			Total Stockholders’ Equity Attributable to Mission West Properties, Inc.			Noncontrolling Interests in Operating Partnerships			Total Equity

Balance, December 31, 2006		19,443,587	$	19	$	149,541	$	(20,682	)	$	128,878		$	501,282		$	630,160

Net income		-		-		-		18,888			18,888			76,960			95,848
Dividends declared per common share and O.P. Unit at $0.64 per share/unit		-		-		-		(12,572	)		(12,572	)		(54,580	)		(67,152	)
Joint ventures distributions		-		-		-		-			-			(785	)		(785	)
Issuance of common stock upon O.P. Unit conversion		220,500		1		2,854		-			2,855			(2,855	)		-
Issuance of O.P. Units – property acquisition		-		-		-		-			-			6,604			6,604
Amortization of stock-based compensation		-		-		629		-			629			-			629
Balance, December 31, 2007		19,664,087		20		153,024		(14,366	)		138,678			526,626			665,304

Net income		-		-		-		10,134			10,134			40,206			50,340
Dividends declared per common share and O.P. Unit at $0.80 per share/unit		-		-		-		(15,782	)		(15,782	)		(68,423	)		(84,205	)
Joint ventures distributions		-		-		-		-			-			(858	)		(858	)
Issuance of common stock upon O.P. Unit conversion		6,970		-		66		-			66			(66	)		-
Issuance of common stock upon option exercise		77,154		-		769		-			769			-			769
Amortization of stock-based compensation		-		-		553		-			553			-			553
Balance, December 31, 2008		19,748,211		20		154,412		(20,014	)		134,418			497,485			631,903

Net income		-		-		-		8,391			8,391			26,058			34,449
Dividends declared per common share and O.P. Unit at $0.65 per share/unit		-		-		-		(14,161	)		(14,161	)		(54,268	)		(68,429	)
Joint ventures distributions		-		-		-		-			-			(1,146	)		(1,146	)
Issuance of common stock upon O.P. Unit conversion		2,122,000		2		15,842		-			15,844			(15,844	)		-
Amortization of stock-based compensation		-		-		352		-			352			-			352
Balance, December 31, 2009		21,870,211	$	22	$	170,606	$	(25,784	)	$	144,844		$	452,285		$	597,129

See notes to consolidated financial statements.

MISSION WEST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


	Year Ended December 31,
	2009			2008			2007
Cash flows from operating activities:
Net income	$	34,449		$	50,340		$	95,848
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,110			23,224			22,735
Amortization of above market lease		-			-			4,091
Gain from disposal of properties classified as discontinued operations		-			-			(6,529	)
Unrealized (gain) from restricted investment in marketable securities		(5,011	)		278			-
Dividend income from restricted investment in marketable securities		(726	)		-			-
Equity in earnings of unconsolidated joint venture		(309	)		(19,617	)		(1,408	)
Distributions from unconsolidated joint venture		250			18,584			2,141
Interest earned on restricted cash		(94	)		(977	)		(1,631	)
Lease termination fee income related to restricted cash		10,864			9,741			(35,636	)
Stock-based compensation expense		352			553			629
Other		-			123			147
Change in operating assets and liabilities, net of liabilities assumed:
Proceeds from (purchase of) investment in marketable securities		3,646			(3,368	)		-
Deferred rent receivables		(870	)		(3,008	)		3,656
Other assets		(4,700	)		(2,575	)		(389	)
Interest payable		68			265			(44	)
Security deposits		(423	)		518			(2,230	)
Deferred rental income		2,575			662			(3,572	)
Accounts payable and accrued expenses		(8,109	)		2,129			1,006
Net cash provided by operating activities		56,072			76,872			78,814

Cash flows from investing activities:
Improvements to investments in real estate		(178	)		(6,468	)		(4,878	)
Net proceeds from sale of properties		-			-			15,431
Acquisition of properties		-			(35,764	)		(47,491	)
Restricted cash held in escrow		(100	)		-			(15,431	)
Restricted cash released for purchase of properties		-			8,082			43,191
Proceeds from release of restricted cash		-			7,654			630
Net cash provided by (used in) investing activities		(278	)		(26,496	)		(8,548	)

Cash flows from financing activities:
Proceeds from mortgage loan payable		-			115,000			-
Principal payments on mortgage notes payable		(12,090	)		(121,612	)		(10,581	)
Principal payments on mortgage notes payable (related parties)		(500	)		(463	)		(430	)
Real estate purchase financing (related parties)		-			19,429			-
Payment on real estate purchase financing (related parties)		-			(19,429	)		-
Proceeds from note payable (related parties)		39,420			3,000			-
Payment on note payable (related parties)		(39,420	)		(3,000	)		-
Proceeds from note payable		22,000			-			-
Net borrowings on revolving line of credit		1,387			13,079			-
Debt issuance costs		-			(1,231	)		-
Loan escrow refund (deposit)		-			1,500			(1,500	)
Net proceeds from exercise of stock options		-			768			-
Distributions paid to noncontrolling interests		(50,775	)		(66,129	)		(55,313	)
Dividends paid to common stockholders		(14,830	)		(14,979	)		(12,536	)
Net cash used in financing activities		(54,808	)		(74,067	)		(80,360	)

Net increase (decrease) in cash and cash equivalents		986			(23,691	)		(10,094	)
Cash and cash equivalents, beginning of year		-			23,691			33,785

Cash and cash equivalents, end of year	$	986		$	-		$	23,691

See notes to consolidated financial statements.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1.	ORGANIZATIONS AND FORMATION OF THE COMPANY

Mission West Properties, Inc. (“the Company”) is a fully integrated, self-administered and self-managed real estate company that acquires and manages research and development (“R&D”)/office properties in the portion of the San Francisco Bay Area commonly referred to as Silicon Valley. In July 1998, the Company purchased an approximate 12.11% interest in each of four existing limited partnerships (referred to collectively as the “operating partnerships”) and obtained control of these partnerships by becoming the sole general partner in each one effective July 1, 1998 for financial accounting and reporting purposes. At that time, all limited partnership interests in the operating partnerships were converted into 59,479,633 Operating Partnership Units (“O.P. Units”), which represented a limited partnership ownership interest of approximately 87.89% of the operating partnerships. The operating partnerships are the vehicles through which the Company holds its real estate investments, makes real estate acquisitions, and generally conducts its business.

As of December 31, 2009, the Company owns a controlling general partner interest of 24.31%, 21.85%, 16.31% and 12.52% in Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III, respectively, for a 20.65% general partner interest in the operating partnerships, taken as a whole, on a consolidated weighted average basis.

The Company, through the operating partnerships, owns interests in 111 R&D properties at December 31, 2009, all of which are located in the Silicon Valley.

Business Segment Information

The Company’s primary business is the ownership and management of R&D/office real estate with a geographic concentration in the Silicon Valley of the San Francisco Bay Area. Accordingly, the Company has concluded that it currently has a single reportable segment.

2.	BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Financial Statement Presentation

Effective July 1, 2009, the Financial Accounting Standards Board Accounting Standards Codification (the “FASB Codification”) became the single source of authoritative generally accepted accounting principles (“GAAP”) in the United States of America. The FASB Codification became the primary source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities and reorganized the previous GAAP pronouncements into accounting topics, which are displayed using a single numerical structure. Certain SEC guidance is also included in the FASB Codification and follows a similar topical structure in separate SEC sections.

The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries, the operating partnerships (the “Company”). All significant intercompany transactions have been eliminated in consolidation.

The Company consolidates all variable interest entities in which it is deemed to be the primary beneficiary.

The preparation of financial statements in conformity with 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Accounting and disclosure decisions with respect to material transactions that are subject to significant management judgments or estimates include impairment of long lived assets, realizability of deferred rent receivables, and allocation of purchase price relating to property acquisitions and the related depreciable lives assigned. Actual results could differ materially from those estimates.

The Company has evaluated subsequent events through the date the consolidated financial statements were issued.

Summary of Significant Accounting Policies:

Real Estate Assets and Related Intangible Assets

Real estate assets are stated at cost. Cost includes expenditures for improvements or replacements. Maintenance and repairs are charged to expense as incurred.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

Effective January 1, 2009, the Company adopted new accounting provision pertaining to operating property acquisitions. This new accounting provision, which the Company adopted on a prospective basis, did not impact the Company’s consolidated financial statements for the periods presented since the Company did not acquire any operating properties during the year ended December 31, 2009. The impact of the new accounting provision on future periods will ultimately depend on acquisition activity, but could be material in periods of increasing acquisition activity due to the new requirements to expense acquisition costs as incurred.

In accordance with the new accounting provision, the Company records the acquired assets and assumed liabilities of operating property acquisitions completed after January 1, 2009 at fair value at the acquisition date. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, unamortized leasing commissions, value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any.

The fair value of buildings and improvements, tenant improvements, and unamortized leasing commissions are based on current market replacement costs and other relevant market rate information. The fair value of land is derived from comparable sales of land within the same region.

The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount recorded for acquired in-place leases is included in real estate related intangible assets in the consolidated balance sheets and amortized as an increase to depreciation and amortization expense over the remaining non-cancelable term of the applicable leases.

The fair value of the above-market or below-market component of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the rents that would be paid using fair market rental rates over the remaining term of the lease. The amounts recorded for above-market or below-market leases are included in real estate assets or real estate related liabilities in the consolidated balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the applicable leases.

Depreciation and Amortization

Depreciation and amortization are computed using the straight-line method over estimated useful lives as follows:

Building shell and base building improvements of newly acquired properties	-	Weighted average composite life of 40 years
Base building improvements made subsequent to initial property acquisition	-	25 years
Tenant improvements and furniture and fixtures	-	Lesser of life of asset, generally 5-10 years, or term of lease
Above-market and in-place lease value	-	Term of lease

Impairment of Long-Lived Assets

The Company reviews real estate assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow, before interest, the Company will recognize an impairment loss equal to the difference between its carrying amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The analysis that the Company prepares in connec tion with determining if there may be any asset impairment loss considers several assumptions: holding period of ten years, 36 months lease up period and cap rate ranging from 8% to 9%. The process of evaluating for impairment requires estimates as to future events and conditions, which are subject to varying market and economic factors, such as the vacancy rates, rental rates and operating costs for R&D facilities in the Silicon Valley area and related submarkets. Therefore, it is reasonably possible that a change in estimate resulting from judgments as to future events could occur which would affect the recorded amounts of the property. No impairment losses were recorded for the years ended December 31, 2009 and 2008.

Discontinued Operations and Properties Held for Sale

The results of operations and net gain or loss on the sale of property and the results of operations on properties classified as held for sale are presented in the consolidated statements of operations as discontinued operations for all periods presented through the date of the applicable disposition if both the following criteria are met: (a) the operation and cash flows of the property have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction; and (b) the Company will not have any significant involvement in the operations of the property after the disposal transaction. Prior period results of operations for these properties are retrospectively adjusted and presented in discontinued operations in prior consolidated statements of operations.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

A property is generally classified as held for sale once management has committed to an action to sell the property, the property is available for immediate sale in its present condition (subject to terms that are usual and customary for sales of such properties), an active program to locate a buyer is initiated, the sale is probable, the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Properties for sale with significant contingencies that may prevent their sale, such as obtaining rezoning approval from the city, are not classified as properties held for sale. Upon the classification of a real estate asset as held for sale, the carrying value of the property is reduced to the lower of its net book value or its fair value, less costs to sell the property. Subsequent to the classification of property as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying consolidated balance sheets. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying consolidated statements of operations. The income (loss) from discontinued operations includes the revenues and expenses, including depreciation, associated with the properties. This classification of operating results as discontinued operations applies retroactively for all periods presented for properties designated as held for sale. Additionally, net gains and losses on properties designated as held for sale are classified as part of discontinued operations. The Company did not have any properties classified as held for sale as of D ecember 31, 2009 and 2008.

Cash and Cash Equivalents

The Company considers highly liquid short-term investments with initial maturities of three months or less to be cash equivalents. Cash and cash equivalents are primarily held in one or more financial institutions, and at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limit.

Restricted Cash

Restricted cash totaled approximately $197 as of December 31, 2009. Of this amount, $97 represents a balance the Company has consolidated due to the accounting provision applicable to a variable interest entity. The Company does not possess or control these funds or have any rights to receive them except as provided in the applicable agreements. Therefore, restricted cash is not available for distribution to stockholders. The balance of restricted cash is a $100 deposit made by the Company for a property purchase offer.

As of December 31, 2008, restricted cash totaled approximately $39,478. In 2009, the Company issued multiple notes in the aggregate amount of $22,000 to M&M Real Estate Control & Restructuring, LLC, a variable interest entity that the Company consolidated, for funds borrowed from restricted cash. The notes bear interest at LIBOR plus 2% and are due December 31, 2010. The proceeds were used to pay outstanding short-term notes issued to the Berg Group and for general corporate purposes.

Funds Held at Qualified Intermediary for 1031 Exchange

Periodically, the Company enters into exchange agreements with qualified intermediaries to facilitate the exchange of real property pursuant to Section 1031 of the Code (“Section 1031 Exchange”). A Section 1031 Exchange generally allows for the deferral of income taxes related to the gain attributable to the sale of property if qualified replacement properties are identified within 45 days and such qualified replacement properties are acquired within 180 days from the initial sale. During the replacement period, the Company may direct the proceeds from a disposition to be held at a qualified intermediary for the sole purpose of completing a Section 1031 Exchange. The proceeds are generally classified as restricted cash.

Restricted Investment in Marketable Securities

Marketable securities reported in the Company’s consolidated balance sheets are accounted for as trading securities. These securities are considered restricted because they are held by our consolidated variable interest entity (see Note 7 below). The marketable securities are adjusted to fair value at the end of each accounting period, with the corresponding gain and loss recorded in unrealized gain or loss from investment. For the years ended December 31, 2009 and 2008, the Company recorded net unrealized gain (loss) of approximately $5,011 and ($278), respectively, related to the increase or decrease in fair value of the marketable securities, which was reported in unrealized gain (loss) from investment in marketable securities in the Company’s consolidated statements of operations.

Other Assets

Included in other assets are costs associated with obtaining debt financing and commissions associated with new leases. Such debt financing costs are being amortized over the term of the associated debt, by a method that approximates the effective interest method and such lease commissions are amortized straight-line over the term of the related lease. If the lease is terminated prior to the end of the lease term, the Company charges any unamortized capitalized lease commission cost to expense in the period that the lease is terminated. Also included in other assets are commitments from the Berg Group of approximately $7,494 to construct a building at 245 Caspian Drive in Sunnyvale, California (see Note 13 below).

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

Noncontrolling Interests in Operating Partnerships

Noncontrolling interests in the operating partnerships represent the proportionate share of the equity in the operating partnerships of the limited partners. Net income attributable to noncontrolling interests is allocated based on their relative ownership percentage of the operating partnerships during the reported period. The issuance of additional shares of common stock or O.P. Units results in changes to the noncontrolling interests’ percentage. As a result, all equity transactions result in an allocation between equity and the noncontrolling interests in the Company’s consolidated balance sheets and statements of equity to account for the changes in the noncontrolling interests’ ownership percentage.

Effective January 1, 2009, the Company adopted new accounting provision with respect to noncontrolling interests. This new guidance requires that amounts formerly reported as minority interests be reported as noncontrolling interests on the Company’s consolidated financial statements. The presentation provision was applied retrospectively to the Company’s consolidated financial statements.

Revenue Recognition

Rental income is derived from operating leases and recognized on the straight-line method of accounting required by GAAP under which contractual rent payment increases are recognized evenly over the lease term. The difference between recognized rental income and rental cash receipts is recorded as “Deferred rent receivable” on the consolidated balance sheets. Certain lease agreements contain terms that provide for additional rents based on reimbursement of certain costs including property operating expenses, maintenance and real estate taxes. These additional rents from tenant reimbursements are reflected on the accrual basis.

Rental income is affected if existing tenants terminate or amend their leases. The Company tries to identify tenants who may be likely to declare bankruptcy, cease operations or otherwise terminate leases prior to the end of the lease term, such as tenants who do not occupy all or a large portion of the property being leased. By anticipating these events in advance, the Company expects to take steps to minimize their impact on its reported results of operations through lease renegotiations and other appropriate measures. Reserves against “Deferred rent receivable” are estimated by management based on known financial conditions of tenants and management’s estimate of net realizability of such receivables based on existing or expected negotiations with tenants. The Company’s judgments and estimations about tenan ts’ capacity to continue to meet their lease obligations will affect the rental income recognized. To date, actual reductions in revenue as a result of early terminations and the tenants’ inability to pay have been within management’s estimates. However, material differences may result in the amount and timing of the Company’s rental income for any period if it made different judgments or estimations.

Lease termination fees are recognized in operating revenues when there is a signed termination letter agreement, all of the conditions of the agreement have been met, the tenant is no longer occupying the property and the termination consideration is probable of collection. These fees are paid by tenants who want to terminate their lease obligations before the end of the contractual term of the lease by agreement with the Company. There is no way of predicting or forecasting the timing or amounts of future lease termination fees.

The Company recognizes income from rent, tenant reimbursements and lease termination fees and other income once all of the following criteria are met in accordance with SEC Staff Accounting Bulletin 104, “Revenue Recognition”:

·	the agreement has been fully executed and delivered;

·	services have been rendered;

·	the amount is fixed and determinable; and

·	the collectability is reasonably assured.

Income Taxes

The Company has been taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, (the “Code”) commencing with the taxable year ended December 31, 1999. In order for the Company to qualify as a REIT, it must distribute annually at least 90% of its REIT taxable income, as defined in the Code, to its stockholders and comply with certain other requirements. Accordingly, for the years ended December 31, 2009, 2008 and 2007, no provision for federal income taxes has been included in the accompanying consolidated financial statements.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

For the year ended December 31, 2009, the Company’s total dividends paid or payable to the stockholders represented approximately 93.4% ordinary income and 6.6% return of capital for income tax purposes (unaudited). For the year ended December 31, 2008, the Company’s total dividends paid or payable to the stockholders represented approximately 73.3% ordinary income, 22.2% capital gain and 4.5% unrecaptured section 1250 gain for income tax purposes (unaudited). For the year ended December 31, 2007, the Company’s total dividends paid or payable to the stockholders represented approximately 97% ordinary income, 2% capital gain and 1% unrecaptured section 1250 gain for income tax purposes (unaudited).

Net Income Per Share

Basic net income available to common stockholders per share is computed by dividing net income available for common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income available to common stockholders per share is computed by dividing net income available for common stockholders by the sum of the weighted-average number of common shares outstanding during the period plus the assumed exercise of all dilutive securities. The impact of the outstanding O.P. Units is considered in the calculation of diluted net income available to common stockholders per share. The O.P. Units are not reflected in the diluted net income available to common stockholders per share calculation because the exchange of O.P. Units into common stock is on a one-for-one basis, and the O.P. Units are alloca ted net income on a per share basis equal to the common stock. Accordingly, any exchange would not have any effect on diluted net income available to common stockholders per share.

Accounting for Stock-Based Compensation

The cost of stock options, restricted stock, stock appreciation rights, and stock units, as well as other equity-based compensation arrangements, granted to employees, directors and consultants is reflected in the consolidated financial statements based on the estimated fair value of the awards. As of December 31, 2009, the Company had one stock-based compensation plan.

The Company measures compensation cost for its stock options at fair value on the date of grant and recognizes compensation expense relating to the remaining unvested portion of outstanding stock options at the time of adoption ratably over the vesting period, generally four years. The fair value of the Company’s stock options is determined using the Black-Scholes option pricing model. Compensation expense related to the Company’s share-based awards is included in general and administrative expenses in the Company’s accompanying consolidated statements of operations. For the year ended December 31, 2009, the Company recorded approximately $352 of expense for share-based compensation relating to stock options.

As of December 31, 2009, there was approximately $192 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the compensation plan. That cost is expected to be recognized over a weighted-average period of approximately two years.

In January 2009, the Company’s Compensation Committee rescinded stock options to purchase a total of 650,000 shares of common stock granted to an employee under its 2004 Equity Incentive Plan in November 2008. The rescission was effected because the number of shares subject to the option grant exceeded the maximum number of shares that can be granted by the Company to one individual in any calendar year under its 2004 Equity Incentive Plan.

In January 2009, stock options to purchase 200,000 shares of common stock held by an employee of the Company expired.

In March 2009, stock options to purchase 500,000 shares of common stock were granted to an employee. Of this total grant, options to purchase 175,000 shares vested immediately, options to purchase 100,000 shares vest monthly for nine months and options to purchase 225,000 shares vest monthly for 36 months, subject to continued employment with the Company. Each option grant has a term of six years from the date of grant subject to earlier termination in certain events related to termination of employment. The options were granted at an exercise price of $5.99 per share. The estimated fair value of the options granted was $0.14 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 13.36%, volatility of 23.77%, risk free rates of 1.83% and an expected life of 5.5 ye ars. All options were granted at fair market value on the date of grant and were approved by the Compensation Committee.

In April 2009, stock options to purchase 375,000 shares of common stock held by an employee of the Company lapsed without exercise.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

In January 2008, stock options to purchase 1,025,000 shares of common stock were granted to employees, non-employee directors and consultants. The options vest monthly for 48 months from date of grant, subject to continued employment or other service to the Company. Each option grant has a term of six years from the date of grant subject to earlier termination in certain events related to termination of employment or service. The options were granted at an exercise price of $9.51 per share. The estimated fair value of the options granted was $0.57 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 8.41%, volatility of 20.43%, risk free rates of 3.45% and an expected life of six years. All options were granted at fair market value on the date of grant and were approved by the Compensation Committee.

In July 2008, stock options to purchase 52,500 shares of common stock were granted to an employee and a non-employee director. The options vest monthly for 48 months from date of grant, subject to continued employment or other service to the Company. Each option grant has a term of six years from the date of grant subject to earlier termination in certain events related to termination of employment or service. The options were granted at an exercise price of $11.36 per share. The estimated fair value of the options granted was $0.99 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 7.04%, volatility of 22.07%, risk free rates of 3.20% and an expected life of six years. All options were granted at fair market value on the date of grant and were approved by the Compensation Committee.

In November 2008, stock options to purchase 705,000 shares of common stock were granted to employees, non-employee directors and consultants (does not include 650,000 rescinded shares stated above). The options vest monthly ranging from 36-48 months from date of grant, subject to continued employment or other service to the Company. Each option grant has a term of six years from the date of grant subject to earlier termination in certain events related to termination of employment or service. The options were granted at an exercise price of $6.14 per share. The estimated fair value of the options granted was $0.12 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 13.03%, volatility of 22.39%, risk free rates of 2.08% and an expected life of six years. All opt ions were granted at fair market value on the date of grant and were approved by the Compensation Committee.

In January 2007, stock options to purchase 710,000 shares of common stock were granted to employees, non-employee directors and consultants. The options vest monthly for 48 months from date of grant, subject to continued employment or other service to the Company. Each option grant has a term of six years from the date of grant subject to earlier termination in certain events related to termination of employment or service. The options were granted at an exercise price of $12.09 per share. The estimated fair value of the options granted in 2007 was $1.45 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 5.29%, volatility of 18.94%, risk free rates of 4.53% and an expected life of six years. All options were granted at fair market value on the date of grant an d were approved by the Compensation Committee.

In 2005, the Company’s Compensation Committee of the Board of Directors, in accordance with the provisions of the 2004 Equity Incentive Plan, unanimously approved the following awards of dividend equivalent rights (“DERs”), each such DER representing the current right to receive the dividend paid on one share of the Company’s common stock, when paid by the Company:

·	The three non-employee outside directors each received 45,000 DERs, which will remain in effect as long as the individual continues to serve on the Board of Directors; and

·	Key employees of the Company received a total of 155,000 DERs, which will remain in effect for each key employee as long as they continue to be employed by the Company.

In 2008, one director and one employee forfeited 45,000 and 15,000 DERs, respectively, when they resigned from the Company. A new non-employee outside director was awarded 45,000 DERs when he joined the Company’s Board of Directors. As of December 31, 2009, there was a total of 275,000 DERs. The Company recorded DER compensation expense of approximately $179, $217 and $186 in 2009, 2008 and 2007, respectively.

Fair Value

On January 1, 2008, the Company adopted the accounting provision for fair value measurements for its financial assets and liabilities measured at fair value on a recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-level hierarchy of valuation techniques based upon whether the inputs reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect its own assumptions of market participant valuation (unobservable inputs) and requires the use of observable inputs if such data is available without undue cost and effort. At December 31, 2009, the Company had approximately $12.1 million of financial assets classified as L evel 1 and thus measured at fair value using quoted market prices for identical instruments in active markets from an independent third party source.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

The only financial asset or liability recorded at fair value in the Company’s consolidated financial statements is the restricted investment in marketable securities. The Company determined the fair value for the marketable securities using quoted prices in active markets for identical securities.

The Company has an option to report selected financial assets and liabilities at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect to apply the fair value option to any specific financial assets or liabilities.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and debt. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, accounts receivable, and accounts payable are carried at amounts that approximate their fair values due to their short-term maturities. For fixed rate debt, the Company estimates fair value by using discounted cash flow analyses based on borrowing rates for similar kinds of borrowing arrangement s. The fair value of the Company’s fixed rate debt at December 31, 2009 was approximately $318,375 compared with its carrying value of approximately $327,079.

Reclassifications

Certain amounts from prior year’s consolidated financial statements have been reclassified to conform to the presentation of the current year’s consolidated financial statements. The reclassifications were to reflect the retrospective adoption of the noncontrolling interests provision. The reclassification resulted in (i) the reclassification of the Company’s minority interests in the consolidated operating partnerships to “noncontrolling interests in operating partnerships,” a component of equity on the Company’s consolidated balance sheets, and (ii) the reclassification of minority interests to “net income attributable to noncontrolling interests” on the Company’s consolidated statements of operations. The reclassifications had no impact on previously reported net income availab le to common stockholders or net income per common share available to common stockholders.

Concentration of Credit Risk

The Company’s properties are not geographically diverse, and its tenants operate primarily in the information technology industry. Additionally, because the properties were leased to 71 tenants at December 31, 2009, default by any major tenant could significantly impact the results of the consolidated total. One tenant, Microsoft Corporation, accounted for approximately 15.8%, 16.5% and 15.1% of the Company’s total cash rental income for the years ended December 31, 2009, 2008 and 2007, respectively. Cash rental income from Microsoft Corporation was approximately $12,873, $12,576 and $12,288 for the years ended December 31, 2009, 2008 and 2007, respectively. Future minimum rents from this tenant are approximately $63,594. One other tenant accounted for approximately 9.4%, 9.8% and 10.8% of the Company’s t otal cash rental income for the years ended December 31, 2009, 2008 and 2007, respectively. During 2009, five of the Company’s tenants relocated or ceased operations.

New Accounting Pronouncements

In June 2009, the FASB issued an Accounting Standards Codification (“Codification”). The Codification does not change U.S. GAAP, but combines all authoritative standards such as those issued by the FASB, AICPA, and EITF, into a comprehensive, topically organized online database. The Codification was released on July 1, 2009 and became the single source of authoritative U. S. GAAP applicable for all nongovernmental entities, except for rules and interpretive releases of the SEC. The Codification is effective for all interim periods and year ends subsequent to September 15, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s financial position, results of operations or cash flows.

In June 2009, the FASB issued new accounting provision regarding the consolidation of variable interest entities (“VIEs”). The new accounting provision modifies the existing quantitative guidance used in determining the primary beneficiary of a VIE by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Additionally, the accounting provision requires an ongoing reconsideration of the primary beneficiary and provides a framework for the events that triggers a reassessment of whether an entity is a VIE. The new acco unting provision becomes effective for all new and existing VIEs on January 1, 2010. The adoption of the accounting provision is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

In April 2009, the FASB issued new accounting provision regarding interim disclosures about fair value of financial instruments. The accounting provision requires (i) disclosure of the fair value of all financial instruments for which it is practicable to estimate that value in interim period financial statements as well as in annual financial statements, (ii) that the fair value information be presented together with the related carrying amount of the asset or liability, and (iii) disclosure of the methods and significant assumptions used to estimate the fair value and changes, if any, to the methods and significant assumptions used during the period. The accounting provision is effective for interim periods ending after June 15, 2009. The adoption of the accounting provision did not have any impact on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued new accounting provision regarding business combinations. The accounting provision requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. It changed the accounting treatment and disclosure for certain specific items in a business combination. The accounting provision requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. The accounting provision applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Based on historical acquisition costs and activity levels, the adoption of the accounting provision on January 1, 2009 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued new accounting provision regarding noncontrolling interests. The accounting provision requires that noncontrolling interests (previously referred to as minority interests) be presented as a component of consolidated equity and eliminates “minority interest accounting” such that the amount of net income attributable to noncontrolling interests be presented as part of consolidated net income on the consolidated statement of operations and not as a separate component of income and expenses. The accounting provision requires a reconciliation of equity attributable to noncontrolling interests and disclosure of those amounts of consolidated net income attributable to noncontrolling interests. The accounting provision is effective for fiscal years beginning on or after December 15, 2008. Th e adoption of the new noncontrolling interests accounting provision on January 1, 2009, which required retroactive adoption of the presentation and disclosure requirements for existing minority interests, had an impact on the Company’s presentation and disclosure of the line items of the consolidated statements of operations and the consolidated balance sheets, but had no material impact on the consolidated financial statements as a whole.

3.	DEFERRED RENT RECEIVABLE, NET

The following table represents activity in the allowance against deferred rent receivable, net for the years ended December 31, 2009, 2008 and 2007.

	Beginning Balance		Provision Against Revenue		Charge-off		Ending Balance
	(dollars in thousands)
Year ended December 31, 2007	$	2,000	$	4,457	$	2,707	$	250
Year ended December 31, 2008	$	250	$	259	$	259	$	250
Year ended December 31, 2009	$	250	$	312	$	312	$	250

4.	STOCK TRANSACTIONS

As of December 31, 2009 and 2008, approximately $2,274 and $2,117 remained outstanding under notes issued in connection with the Company’s purchase of its general partner interests in 1998 (the “demand notes”), respectively. The demand notes which accrue interest at 7.25%, along with the interest expense (interest income to the operating partnerships), are eliminated in consolidation and are not included in the corresponding line items within the consolidated financial statements. However, the interest income earned by the operating partnerships, which is interest expense to the Company, in connection with this debt, is included in the calculation of noncontrolling interest as reported on the consolidated statements of operations, thereby reducing the Company’s net income by this same amount. The Company and the operating partnerships have agreed to extend the due date of the demand notes to September 30, 2011. At present, the Company’s only means for repayment of this debt is through distributions received from the operating partnerships in excess of the amount of dividends to be paid to the Company’s stockholders or by raising additional equity capital.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

The limited partners of the operating partnerships have the right to tender their O.P. Units to the Company for shares of common stock or, at the Company’s election, for cash. Each of the limited partners of the operating partnerships (other than Carl E. Berg and Clyde J. Berg) has the annual right to exercise put rights and cause the operating partnerships to purchase a portion of the limited partner’s O.P. Units at a purchase price based on the average market value of the common stock for the 10-trading day period immediately preceding the date of tender, generally limited to one-third of the aggregate number of O.P. Units owned by each limited partner. Upon the exercise of any such right by a limited partner, the Company will have the option to purchase the tendered O.P. Units with available cash, borrowed funds or the proceeds of an offering of newly issued shares of common stock. These put rights are available once a year. If the total purchase price of the O.P. Units tendered by all of the eligible limited partners in one year exceeds $1 million, the Company or the operating partnerships is entitled in its discretion to reduce proportionately the number of O.P. Units to be acquired from each tendering limited partner so that the total purchase price does not exceed $1 million.

There were no stock option exercises in 2009.

During the year ended December 31, 2008, stock options to purchase 70,487 shares of the Company’s common stock were exercised at $10.00 per share and stock options to purchase 6,667 shares of the Company’s common stock were exercised at $9.51 per share. Total proceeds to the Company were approximately $768.

There were no stock option exercises in 2007.

In 2009, 2008 and 2007, 2,122,000, 6,970 and 220,500 O.P. Units were exchanged for 2,122,000, 6,970 and 220,500 shares of the Company’s common stock, respectively, under the terms of the Exchange Rights Agreement among the Company and all limited partners of the operating partnerships. Neither the Company nor the operating partnerships received any proceeds from the issuance of the common stock in exchange for O.P. Units.

5.	NONCONTROLLING INTERESTS IN OPERATING PARTNERSHIPS

Noncontrolling interests represent the separate private ownership of the operating partnerships, by the Berg Group and other non-affiliate interests. In total, these interests account for 79.35% and 81.27%, on a weighted average basis, of the ownership interests in the real estate operations of the Company as of December 31, 2009 and 2008, respectively. Noncontrolling interests in earnings have been calculated by taking the net income of the operating partnerships (on a stand-alone basis) multiplied by the respective noncontrolling interests’ ownership percentage.

The operating partnerships have ownership interests of 83.33%, 75% and 50% and act as the managing member in three separate joint ventures, which were established to hold properties. The operating partnerships control the joint ventures, and accordingly, these joint ventures are consolidated in the Company’s consolidated financial statements. The noncontrolling interests in the joint ventures are reflected as a component of noncontrolling interests of the operating partnerships. For the years ended December 31, 2009, 2008 and 2007, income associated with the noncontrolling interests held by third parties of the three consolidated joint ventures was approximately $407, $368 and $502, respectively.

6.	REAL ESTATE

Property Acquisitions

There were no property acquisitions in 2009.

On January 1, 2008, the Company acquired an approximately 110,500 rentable square foot newly constructed R&D building located at 5981 Optical Court in San Jose, California from the Berg Group under the Berg Land Holdings Option Agreement. The total acquisition price for this property was approximately $19,068. The Company acquired this property by issuing a short-term note payable to the Berg Group, which was fully paid off in July 2008. The Company allocated the purchase price to land and building based upon the estimated relative fair values of such assets. Because the acquired property was vacant, there was no purchase price allocation to lease intangible assets. The property was leased within several days after the acquisition date.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

On February 29, 2008, the Company acquired a fully leased office/R&D building comprised of approximately 75,300 rentable square feet at 2904 Orchard Parkway in San Jose, California from an unrelated party for approximately $16,696. The acquisition was partially funded from the proceeds received from the 1170 Morse Avenue property sale (see below under “Property Dispositions”), which were held by a third party and classified as restricted cash as of December 31, 2007. The purchase price of 2904 Orchard Parkway was allocated to long-lived assets and the value of an in-place lease. The in-place lease was valued at fair market so there was no intangible asset allocated to above-or-below market lease value. The Company recorded approximately $1,121 of the purchase price as real estate related intangible asset in the accomp anying consolidated balance sheet for the value of an in-place lease. The intangible asset is amortized over the applicable remaining lease term.

The purchase price allocation for these property acquisitions was determined in accordance with the accounting provision for property acquisitions:

The fair value of the tangible assets of an acquired property, which includes land, building and tenant improvements, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets. Factors considered by management in performing these analyses include certain costs during the lease-up periods considering current market conditions and costs to execute similar leases. These costs include estimates of lost rental income, leasing commissions and tenant improvements.

The capitalized value of above-market and below-market leases and acquired in-place lease values, included in real estate related intangible assets in the accompanying consolidated balance sheets, is amortized to expense as amortization of real estate over the remaining non-cancelable lease term. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off in the period that the lease is terminated.

Property Dispositions

There were no property dispositions in 2009 and 2008 other than through our unconsolidated joint venture, TBI-MWP.

Berg Land Holdings Option Agreement

Under the terms of the Berg Land Holdings Option Agreement, the Company, through the operating partnerships, has the option to acquire any future R&D property developed by the Berg Group on land currently owned or optioned, or acquired for these purposes in the future, directly or indirectly, by Carl E. Berg or Clyde J. Berg. This agreement will expire on December 31, 2010, after which the Company will no longer have the right to acquire properties from the Berg Group on the pre-determined terms provided in that agreement. At present, there are approximately 84 acres of Silicon Valley land, including land under development, owned directly or under 50% joint venture entities by certain members of the Berg Group that are subject to the terms of the Berg Land Holdings Option Agreement. The owners of the future R&D property devel opments may obtain cash or, at their option, O.P. Units valued at the average closing price of the shares of common stock over the 30-trading-day period preceding the acquisition date. To date, the Company has completed 23 acquisitions under the Berg Land Holdings Option Agreement representing approximately 2,243,000 rentable square feet. The acquired properties cost approximately $237,775, for which the Company issued 8,482,085 O.P Units and assumed debt of approximately $141,410. Upon the Company’s exercise of an option to purchase any of the future R&D property developments, the acquisition price will equal the sum of (a) the full construction cost of the building; plus (b) 10% of the full construction cost of the building; plus (c) interest at LIBOR (London Interbank Offered Rate) plus 1.65% on the amount of the full construction cost of the building for the period from the date funds were disbursed by the developer to the close of escrow; plus (d) the original acquisition cost of th e parcel on which the improvements will be constructed, which range from $8.50 to $20.00 per square foot for land currently owned; plus (e) 10% per annum of the amount of the original acquisition cost of the parcel from the later of January 1, 1998 or the seller’s acquisition date to the close of escrow; minus (f) the aggregate principal amount of all debt encumbering the acquired property, or a lesser amount as approved by the members of the Independent Directors committee of the Company’s Board of Directors. Generally, the Company will not acquire any projects until they are fully completed and leased.

No estimate can be given at this time as to the total cost to the Company to acquire future projects under the Berg Land Holdings Option Agreement, or the timing as to when the Company will acquire such projects. In addition to any projects currently under development, the Company has the right to acquire future developments by the Berg Group on up to 84 additional acres of land currently controlled by the Berg Group, which could support approximately 1.4 million square feet of new developments. Under the Berg Land Holdings Option Agreement, as long as the Berg Group ownership in the Company and the operating partnerships taken as a whole is at least 65%, or until December 31, 2010, whichever occurs first, the Company also has an option to purchase all land acquired, directly or indirectly, by Carl E. Berg or Clyde J. Berg in th e future which has not been improved with completed buildings and which is zoned for, intended for or appropriate for R&D, office and/or industrial development or use in the states of California, Oregon, and Washington.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

Although the Company has the right to acquire the new properties available to it under the terms of the Berg Land Holdings Option Agreement, there can be no assurance that the Company actually will consummate any intended transactions. Furthermore, the Company has not yet determined the means by which it would acquire and pay for any such properties or the impact of any of the acquisitions on its business, results of operations, financial condition or available cash for distribution.

7.	VARIABLE INTEREST ENTITY

Under the variable interest entity (“VIE”) accounting provision, a VIE must be consolidated by a company if that company is subject to a majority of the entity’s expected losses or entitled to receive a majority of the entity’s expected residual returns or both. The provision requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest.

Under the provision, for an entity to qualify as a VIE one or more of the following three characteristics must exist:

1.	The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support by any parties, including the equity holders.

2.	The equity investors lack one or more of the following essential characteristics of a controlling financial interest:

a.	the direct or indirect ability to make decisions about the entity’s activities through voting or similar rights;

b.	the obligation to absorb the expected loss of the entity;

c.	the right to receive the expected residual returns of the entity; 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.

In August 2007, one of the Company’s tenants, Ciena Corporation, entered into an assignment of lease agreement with an unrelated party, M&M Real Estate Control & Restructuring, LLC (“M&M”), in connection with leases for approximately 445,000 rentable square feet located in San Jose, California. As a result of the assignment, M&M assumed all of Ciena’s remaining obligations under these leases and received a payment from Ciena of $53,000, of which $7,000 was reserved for tenant improvements. At the same time, the Company entered into a consent for assignment of lease with both parties and a mutual release agreement with Ciena, pursuant to which all of Ciena’s obligations under these leases were effectively transferred to M&M. M&M is obligated to continue to perform all of the obliga tions under the assumed Ciena leases and has the right to sublease any or all of the 444,500 rentable square feet vacated by Ciena for the remainder of the current lease term, which expires in 2011. Under the terms of the assignment of lease agreement, the Company received monthly rent payments of approximately $789 from July 2007 through June 2008, received $818 from July 2008 through June 2009, is receiving $849 from July 2009 through June 2010, and will receive $881 from July 2010 through June 2011 and $915 from July 2011 through December 2011. Based upon the accounting provision for VIE, the Company determined that M&M is a VIE. The Company further determined that it is the primary beneficiary of this VIE and therefore has consolidated this entity for financial reporting purposes. Upon consolidation, the Company recognized a gross lease termination fee of $46,000 in August 2007.

Factors considered by the Company in determining whether M&M should be considered a VIE for financial reporting purposes included the following:

·	No equity was contributed by the partners in the formation of M&M.

·	At present, the assigned leases are the only properties under management by M&M.

·	Because M&M does not have an operating history that demonstrates its ability to finance its activities without additional subordinated financial support.

·	All revenues, other than interest income, are generated by M&M from the Company in the form of fees or commissions.

The Company remains at risk with respect to the assigned leases because if M&M’s operating expenses exceed its interest income, fees and commissions there would be insufficient funds to meet the assigned lease obligation without additional financial support from equity holders or other parties. The Company, which had released the original tenant from its obligations under the lease, would have to absorb the majority of any loss, making it the primary beneficiary of M&M’s activities.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

DEBT

The following table sets forth certain information regarding debt outstanding as of December 31, 2009 and 2008.

		Balance at December 31,
Debt Description	Collateral Properties	Balance at December 31,		Maturity Date	Interest Rate
		2009	2008
		(dollars in thousands)
Line of Credit:
Heritage Bank of Commerce (1)	1600 Memorex Drive, Santa Clara, CA 1688 Richard Avenue, Santa Clara, CA 1700 Richard Avenue, Santa Clara, CA	$14,466	$13,079	September 2011	(1)

Mortgage Notes Payable (related parties) (2) :	5300-5350 Hellyer Avenue, San Jose, CA	8,261	8,761	June 2013	7.650%

Note Payable (related parties):	Not Applicable	9,325	-	June 2010	(6)

Mortgage Notes Payable (2) :
Hartford Life Insurance Company (3) Hartford Life and Accident Insurance Company Hartford Life and Annuity Insurance Company (collectively known as the “Hartford Loan”)	5981 Optical Court, San Jose, CA 5500 Hellyer Avenue, San Jose, CA 5550 Hellyer Avenue, San Jose, CA 4050 Starboard Drive, Fremont, CA 45738 Northport Loop, Fremont, CA 233 South Hillview Drive, Milpitas, CA 10300 Bubb Road, Cupertino, CA 1230 E. Arques, Sunnyvale, CA 1250-1280 E. Arques, Sunnyvale, CA 1212 Bordeaux Lane, Sunnyvale, CA 2904 Orchard Parkway, San Jose, CA 3236 Scott Blvd, Santa Clara, CA 6311 San Ignacio Avenue, San Jose, CA 6321-6325 San Ignacio Avenue, San Jose, CA 6331 San Ignacio Avenue, San Jose, CA 6341-6351 San Ignacio Avenue, San Jose, CA 3540-3580 Bassett Street, Santa Clara, CA	111,485	114,513	October 2018	6.210%

Northwestern Mutual Life Insurance Co. (4)	1750 Automation Parkway, San Jose, CA 1756 Automation Parkway, San Jose, CA 1762 Automation Parkway, San Jose, CA 6320 San Ignacio Avenue, San Jose, CA 6540-6541 Via Del Oro, San Jose, CA 6385-6387 San Ignacio Avenue, San Jose, CA 20605-20705 Valley Green Drive, Cupertino, CA 2001 Walsh Avenue, Santa Clara, CA 2220 Central Expressway, Santa Clara, CA 2300 Central Expressway, Santa Clara, CA 2330 Central Expressway, Santa Clara, CA	77,444	81,308	January 2013	5.640%

Allianz Life Insurance Company (I) (5)	5900 Optical Court, San Jose, CA	22,146	23,009	August 2025	5.560%

Allianz Life Insurance Company (II) (5)	5325-5345 Hellyer Avenue, San Jose, CA 1768 Automation Parkway, San Jose, CA 2880 Scott Boulevard, Santa Clara, CA 2890 Scott Boulevard, Santa Clara, CA 2800 Scott Boulevard, Santa Clara, CA 10450-10460 Bubb Road, Cupertino, CA 6800-6810 Santa Teresa Blvd., San Jose, CA 6850 Santa Teresa Blvd., San Jose, CA 4750 Patrick Henry Drive, Santa Clara, CA	107,743	112,078	August 2025	5.220%

		318,818	330,908

Total		$350,870	$352,748

(1)

The Heritage Bank of Commerce (“HBC”) line of credit was obtained in March 2008. In April 2008, the Company entered into a change in terms agreement with HBC that increased the facility from $10 million to $17.5 million. In October 2009, the Company entered into a change in terms agreement with HBC to amend the maturity date to September 15, 2011. The interest rate on the revolving line of credit is the greater of LIBOR plus 1.75% or 4.00% per annum. The interest rate for the HBC line of credit at December 31, 2009 and 2008 was 4.00% and 3.17%, respectively. The Company paid in aggregate approximately $49 in loan and legal fees. The HBC line of credit contains certain financial loan and reporting covenants as defined in the loan agreement. As of December 31, 2009, the Company was in compliance with these loan covenants.

(2)

Mortgage notes payable and mortgage note payable (related parties) generally require monthly installments of interest and principal ranging from approximately $96 to $840 over various terms extending through the year 2025. The weighted average interest rate for the mortgage notes payable was 5.74% and 5.86% at December 31, 2009 and 2008, respectively.

(3)

The Hartford loan is payable in monthly installments of approximately $838, which includes principal (based upon a 20-year amortization) and interest. Costs and fees incurred with obtaining this loan aggregated approximately $1,058, which were deferred and amortized over the loan period. The Hartford loan contains certain customary covenants as defined in the loan agreement. As of December 31, 2009, the Company was in compliance with these loan covenants.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

(4)

The Northwestern loan is payable in monthly installments of approximately $696, which includes principal (based upon a 20-year amortization) and interest. Costs and fees incurred with obtaining this loan aggregated approximately $664, which were deferred and amortized over the loan period. The Northwestern loan contains certain customary covenants as defined in the loan agreement. As of December 31, 2009, the Company was in compliance with these loan covenants.

(5)

The Allianz loans are payable in monthly installments of approximately $1,017, which includes principal (based upon a 20-year amortization) and interest. Costs and fees incurred with obtaining these loans aggregated approximately $1,125, which were deferred and amortized over the loan periods. The Allianz loans contain certain customary covenants as defined in the loan agreements. As of December 31, 2009, the Company was in compliance with these loan covenants.

(6)	The Company issued a short-term note to the Berg Group in connection with the quarterly dividend distributions. The interest rate of the note payable is LIBOR plus 1.75%. The interest rate for the note payable was 1.98% at December 31, 2009.

During 2009, the Company issued multiple short-term notes payable to the Berg Group in connection with quarterly dividend distributions. The interest rates on these notes were LIBOR plus 1.75%. The aggregate loan amount totaled approximately $48,745. Of the amount owed, the Company has repaid approximately $39,420 to the Berg Group. For the year ended December 31, 2009, interest expense incurred in connection with those short-term notes payable was approximately $112.

On March 4, 2008, the Company established a $10,000 uncollateralized revolving line of credit with Heritage Bank of Commerce (“HBC”). The Company paid approximately $26 in loan and legal fees. On April 17, 2008, the Company entered into a change in terms agreement with HBC that increased the facility from $10,000 to $17,500. On October 13, 2009, the Company entered into a change in terms agreement with HBC to amend the maturity date to September 15, 2011. The interest rate on the revolving line of credit is the greater of LIBOR plus 1.75% or 4.00% per annum. The Company paid approximately $23 in loan and legal fees. The HBC loan is secured by three properties consisting of approximately 0.2 million rentable square feet. The HBC line of credit contains certain financial loan and reporting covenants as defined in the loan agreements. As of December 31, 2009, the Company was in compliance with these loan covenants. The proceeds from the HBC line of credit may be used to repay debt, complete acquisitions and finance other working capital requirements.

On October 1, 2008, the Company entered into a fixed rate term agreement and related contracts and instruments for a secured mortgage loan totaling $115,000 from Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (the “Hartford Loan”). The proceeds were used primarily to repay the remaining balance of an existing mortgage loan with Prudential Mortgage Capital Company and to provide other working capital needs. The Hartford Loan bears a fixed interest rate of 6.21%, with a 20-year amortization, and matures October 1, 2018, at which time any outstanding principal and interest will be due. Pursuant to the loan agreement, monthly principal and interest installment payments of approximately $838 are due on the first day of each month. The Hartford Loan is secured by 20 properties consisting of approximately 1.6 million rentable square feet. The Company paid approximately $1,058 in loan fees and financing costs, which are amortized over the ten year loan period. The Company has the option to prepay the Hartford Loan, subject to certain yield maintenance provisions, though generally no prepayment is permitted during the first 24 months of the loan term. In general, the properties securing the Hartford Loan cannot be sold or otherwise transferred without the lender’s consent. The loan balance may be accelerated in full in the event of a prohibited sale or transfer. The Hartford Loan is nonrecourse to the operating partnerships. Under the terms of a carveout indemnity agreement and an environmental indemnity agreement, the Company may be liable for the unpaid balance of the Hartford Loan and other obligations arising under the circumstances provided in such agreements.

During 2008, the Company issued multiple short-term notes payable to the Berg Group in connection with a property acquisition, quarterly dividend distributions and a cash loan. The interest rates on these notes were LIBOR plus 1.75%. The aggregate loan amount totaled approximately $50,588 and was fully repaid as of December 31, 2008. For the year ended December 31, 2008, interest expense incurred in connection with those short-term notes payable was approximately $643.

Scheduled principal payments on debt as of December 31, 2009 are as follows:

	Total Debt (Including Related Parties)
December 31, 2010	$	22,653
December 31, 2011		28,575
December 31, 2012		14,935
December 31, 2013		81,269
December 31, 2014		10,891
Thereafter		192,547
Total	$	350,870

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

9.	OPERATING PARTNERSHIP AND STOCKHOLDER DISTRIBUTIONS

Holders of the Company’s common stock and O.P. Units are entitled to dividend distributions as determined and declared by the Company’s Board of Directors. Under the Exchange Rights Agreement limited partners have the right to tender O.P. Units to the Company, and, at the Company’s election, to receive common stock on a one-for-one basis at then-current market value, an equivalent amount of cash, or a combination of cash and common stock in exchange for the O.P. Units tendered, subject to the 9% overall ownership limit imposed on non-Berg Group stockholders under the Company’s charter document, or the overall 20% Berg Group ownership limit, as the case may be. O.P. Unit holders are entitled to vote when their O.P. Units are converted to shares of the Company’s common stock. Once in each 12-month period b eginning each December 29, the limited partners, other than Carl E. Berg and Clyde J. Berg, may exercise a put right to sell their O.P. Units to the operating partnerships at a price equal to the average market price of the common stock for the 10-trading day period immediately preceding the date of tender. Upon any exercise of the put rights, the Company will have the opportunity for a period of 15 days to elect to fund the purchase of the O.P. Units and purchase additional general partner interests in the operating partnerships for cash, unless the purchase price exceeds $1 million in the aggregate for all tendering limited partners, in which case, the operating partnerships or the Company will be entitled, but not required, to reduce proportionally the number of O.P. Units to be acquired from each tendering limited partner so that the total purchase price is not more than $1 million.

During 2009, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.65 per common share and O.P. Unit for total dividends/distributions of approximately $68,429, including $15,791 payable in January 2010. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $49,911.

During 2008, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.80 per common share and O.P. Unit for total dividends/distributions of approximately $84,204, including $21,055 payable in January 2009. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $63,040.

During 2007, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.64 per common share and O.P. Unit for total dividends/distributions of approximately $67,152, including $16,832 payable in January 2008. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $50,271.

10.	EQUITY-BASED COMPENSATION AND RETIREMENT INVESTMENT PLANS

On November 24, 2004, the 2004 Equity Incentive Plan (“2004 Plan”) was approved by the Company’s stockholders. The Company’s board of directors approved the 2004 Plan in September 2004. The 2004 Plan:

·	transferred up to 3,991,089 remaining shares available for issuance under the Company’s 1997 Plan and terminated the 1997 Plan for any new grants;

·	transferred up to an additional 767,000 shares subject to outstanding options under the 1997 Plan if they expire without being exercised, of which 272,000 shares had been transferred as of December 31, 2008; and

·	includes the ability to grant restricted stock, restricted stock units, performance units, dividend equivalent rights, and other stock-based compensation, including O.P. Units of the Operating Partnerships, as well as incentive and non-statutory stock options.

The 2004 Plan was adopted so that the Company may attract and retain the high quality employees, directors and consultants necessary to build the Company’s infrastructure and to provide ongoing incentives to the Company’s employees in the form of options to purchase the Company’s common stock by enabling them to participate in the Company’s success.

The 2004 Plan provides for the granting to employees, including officers (whether or not they are directors) of “incentive stock options” within the meaning of Section 422 of the Code, and for the granting of non-statutory options to employees, directors and consultants of the Company. 1,255,535 and 1,180,535 shares of common stock were available for future option or award grants under the 2004 Plan as of December 31, 2009 and 2008, respectively.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)MISSION WEST PROPERTIES, INC.

The following table shows the activity and detail for the 2004 Plan for each of the three years in the period ended December 31, 2009.

	Options			Weighted Average Exercise Price
	Outstanding			Per Share
Balance, December 31, 2006		1,037,000		$	10.48
Options granted		710,000		$	12.09
Balance, December 31, 2007		1,747,100		$	11.13
Options granted		1,782,500		$	8.23
Options exercised		(77,154	)	$	9.96
Options forfeited		(119,946	)	$	10.81
Balance, December 31, 2008		3,332,500		$	9.62
Options granted		500,000		$	5.99
Options forfeited		(575,000	)	$	10.70
Balance, December 31, 2009		3,257,500		$	8.87
Available for grant at December 31, 2009		1,255,535
Available for grant at December 31, 2008		1,180,535

The following table summarizes information regarding options outstanding for the 2004 Plan at December 31, 2009:

	Options Outstanding			Options Exercisable		Options Not Exercisable
Range of Exercise Prices	Options	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price	Options	Weighted Average Exercise Price	Options	Weighted Average Exercise Price
$5.99	500,000	5.17	$5.99	331,250	$5.99	168,750	$5.99
$6.14	705,000	4.92	$6.14	324,688	$6.14	380,312	$6.14
$9.51	760,000	4.00	$9.51	364,167	$9.51	395,833	$9.51
$10.00	590,000	1.33	$10.00	590,000	$10.00	-	-
$11.36	52,500	4.58	$11.36	18,594	$11.36	33,906	$11.36
$12.09	650,000	3.00	$12.09	473,958	$12.09	176,042	$12.09

$5.99 to $12.09	3,257,500	3.70	$8.87	2,102,657	$9.17	1,154,843	$8.33

None of the options granted are contingent upon the attainment of performance goals or subject to other restrictions. As of December 31, 2009 and 2008, “in-the-money” outstanding options to purchase 655,938 and 148,438 shares of common stock, respectively, were exercisable.

The remaining contractual lives of unexercised option grants range from April 2010 to March 2015.

The 2004 Plan allows the Company to grant to employees and directors a wider range of awards, including restricted stock, stock grants, restricted stock units, performance units, other stock-based compensation, including O.P. Units exchangeable for shares of common stock, and dividend equivalent rights, which will help the Company achieve its goal of attracting, retaining and motivating its personnel which is necessary to build the Company’s infrastructure, achieve the Company’s business goals and enhance stockholder value. No options or awards may be granted under the 2004 Plan after November 24, 2014.

Awards and options granted under the 2004 Plan may be granted to any employees, non-employee directors or consultants of the Company and any corporation or other entity affiliated with the Company, including the Operating Partnerships. Only employees of the Company or a corporate subsidiary may receive incentive stock options. Options can be granted to non-employee directors and consultants of the Company and to employees of the Company or a corporate subsidiary. No individual may receive in any one calendar year options for more than 500,000 of the total number of shares of stock.

The options generally are granted at the fair market value of the Company’s common shares at the date of grant, vest over a four year period, are exercisable upon vesting and expire six years from the date of grant. The exercise price for all incentive stock options under the 2004 Plan shall not be less than the fair market value of the underlying common shares at the time the option was granted.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

Under the 2004 Plan, each non-employee member of the board of directors who became or becomes a member of the board of the directors after November 24, 2004, the date on which the 2004 Plan was approved by the Company’s stockholders, will receive automatically a grant of an option to purchase 50,000 shares of common stock at an exercise price equal to 100% of the fair market value of the common stock at the date of grant of such option. Such options become exercisable cumulatively with respect to 1/48th of the underlying shares on the first day of each month following the date of grant. Generally, the options must be exercised while the optionee remains a director. In addition, the board of directors may authorize annual option grants or awards to non-employee directors in the board’s discretion as long as the number of s hares or equivalent number of underlying shares of common stock in the case of certain awards, does not exceed 50,000 per year. A disinterested majority of the board also may authorize additional options and awards to a director serving as a Committee chair or providing other extraordinary service to the Board. The 2004 Plan further provides that upon an acquisition of the Company in which more than 50% of the total voting power of the Company’s outstanding securities is transferred to the acquirer or acquiring parties, options and awards held by non-employee directors will vest in full and become exercisable prior to their expiration.

The board of directors may terminate the 2004 Plan at any earlier time or make modifications of the 2004 Plan as it deems advisable. Awards and options granted at any time during the term of the 2004 Plan will not expire solely because of the termination of the 2004 Plan, and no amendment or modification of the 2004 Plan shall affect the terms of any outstanding award unless the board expressly provides otherwise. Termination or amendment of the 2004 Plan may not adversely affect the rights of the recipient of an award without his or her consent. The Compensation Committee of the Board of Directors may amend the terms of any option or award previously granted, but such amendment may not impair the rights of the recipient without his or her consent.

A total of 4,263,089 shares of common stock are reserved for issuance under the 2004 Plan. At no time may the number of shares issued pursuant to or subject to outstanding awards granted under the 2004 Plan exceed this number, subject to the provisions for increase and adjustment set forth in the 2004 Plan. If any option or award expires, terminates or is cancelled without being exercised in full, or any other award is forfeited, the shares forfeited or not purchased will be available for future grant of awards.

The Company has adopted an employee investment plan (the “Plan”), under Section 401(k) of the Internal Revenue Code. Employees who are at least 21 years old and who have completed six months of eligibility service may become participants in the Plan. Each participant may make contributions to the Plan through salary deferrals in amounts of at least 1% to a maximum of 15% of the participant’s compensation, subject to certain limitations imposed by the Internal Revenue Code. The Company contributes an amount up to 15% of the participant’s compensation, based upon management’s discretion. A participant’s contribution to the Plan is 100% vested and non-forfeitable. A participant will become vested in 100% of the Company’s contributions after two years of eligible service. For the years ended Dece mber 31, 2009, 2008 and 2007, the Company recognized approximately $125, $118 and $123, respectively, of expense for employer contributions made in connection with this Plan.

11.	NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the sum of weighted-average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities.

The following table provides a reconciliation of net income available to common stockholders and the number of shares used in the computations of “basic” net income per share available to common stockholders and “diluted” net income per share available to common stockholders.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

	Year Ended December 31, 2009		Year Ended December 31, 2008		Year Ended December 31, 2007
	(dollars in thousands, except per share data)
Numerator:
Income from continuing operations	$	8,391	$	10,134	$	17,757
Income from discontinued operations		-		-		1,131
Net income available to common stockholders	$	8,391	$	10,134	$	18,888

Denominator:
Weighted average shares of common stock (basic)		21,736,699		19,714,414		19,627,234
Effect of dilutive securities:
Incremental shares from assumed stock options exercise		186,405		281,935		227,177
Weighted average shares of common stock (diluted)		21,923,104		19,996,349		19,854,411

Per share data:
Basic net income per share:
Net income to common stockholders before discontinued operations	$	0.39	$	0.51	$	0.90
Discontinued operations		-		-		0.06
Net income available to common stockholders	$	0.39	$	0.51	$	0.96
Diluted net income per share:
Net income to common stockholders before discontinued operations	$	0.38	$	0.51	$	0.89
Discontinued operations		-		-		0.06
Net income available to common stockholders	$	0.38	$	0.51	$	0.95

Outstanding options to purchase 2,052,500 shares in 2009 and 2,627,500 shares in 2008 were excluded from the computation of diluted net income per share under the treasury stock method because the option exercise price was greater than the weighted average exercise price of the Company’s common stock during the period. The outstanding O.P. Units have been excluded from the diluted net income per share calculation as there would be no effect on the diluted net income per share since the noncontrolling interests’ share of income would also be added back to net income. O.P. Units outstanding at December 31, 2009, 2008 and 2007 were 83,404,965, 85,526,965 and 85,533,935, respectively.

12.	OTHER INCOME

Other income from continuing operations was approximately $3,756, $4,223 and $61,982 for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009, deposit forfeiture, insurance claim, prior tenant bankruptcy settlement, management fee income, and miscellaneous income accounted for approximately $2,019, $300, $68, $992 and $377, respectively, of other income. For the year ended December 31, 2008, termination fees, management fee income and miscellaneous income accounted for approximately $3,007, $967 and $249, respectively, of other income. For the year ended December 31, 2007, termination fees, prior tenant bankruptcy settlements, management fee income, security deposit forfeitures and miscellaneous income accounted for approximately $57,515, $300, $982, $1,799 and $1,386, respectively, of other income.

13.	RELATED PARTY TRANSACTIONS

As of December 31, 2009, the Berg Group owned 75,880,384 O.P. Units of the total 83,404,965 O.P. Units issued and outstanding. As of December 31, 2008, the Berg Group owned 77,902,384 O.P. Units of the total 85,526,965 O.P. Units issued and outstanding. The Berg Group’s interest in the Company represents 74.0% of the Company as of December 31, 2009 and 2008, respectively, assuming conversion of the O.P. Units into common shares of the Company.

The Company periodically acquires non-leased properties, which include land, the building shell and base building improvements, from the Berg Group under the Berg Group Land Holdings Options Agreement. These acquisitions from the Berg Group are made for properties where the Company has previously identified a tenant, and in conjunction with the acquisition, the Company executes a lease agreement with the tenant. In many of the acquisitions from the Berg Group, lease commissions relating to these leasing activities conducted by the Company are paid by the Berg Group and reimbursed by the Company in connection with the acquisition. These lease commissions are recorded separately in “Other assets” on the Company’s consolidated balance sheets.

Property Acquisition

There were no property acquisitions from the Berg Group in 2009.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

In January 2008, the Company acquired an approximately 111,500 rentable square foot newly constructed R&D building located at 5981 Optical Court in San Jose, California from the Berg Group under the Berg Land Holdings Option Agreement. The total acquisition price for this property was approximately $19,068. The Company acquired this property by issuing a short-term note payable to the Berg Group, which was fully repaid in July 2008. The transaction was approved by the Independent Directors Committee of the Company’s Board of Directors.

Debt with the Berg Group

As of December 31, 2009 and 2008, debt in the amount of approximately $8,261 and $8,761, respectively, was due the Berg Group under a mortgage note established May 15, 2000 in connection with the acquisition of a 50% interest in Hellyer Avenue Limited Partnership, the obligor under the mortgage note. The mortgage note bears interest at 7.65%, and is due in ten years with principal payments amortized over 20 years. In the fourth quarter of 2008, the Company and the Berg Group agreed to extend the loan maturity date to June 2013. Interest expense incurred in connection with the Berg Group mortgage note was approximately $653, $690 and $724 for the years ended December 31, 2009, 2008 and 2007, respectively.

Transfer of Interest to Berg Group in Consolidated Joint Venture

In July 2000, the Hellyer Avenue Limited Partnership (“Hellyer LP”) was formally organized as a California limited partnership between Mission West Properties, L.P. (“MWP”), of which the Company as the managing general partner, and Republic Properties Corporation (“RPC”), an unaffiliated third party, as general partner and limited partners. MWP was designated as the managing general partner of Hellyer LP. For a 50% ownership interest in Hellyer LP, RPC agreed to cause Stellex Microwave Systems, Inc. (“Stellex”) to provide a 15-year lease on approximately 160,000 square foot R&D buildings to be constructed by Berg & Berg Enterprises, Inc. (“BBE”) on land owned by another Berg Group member.

As part of the transaction, MWP acquired the underlying land pursuant to the Berg Land Holdings Option Agreement for a price of $5.7 million by issuing 659,223 O.P. Units to the Berg Group entity that owned the property. Further, under the terms of the Hellyer LP partnership agreement MWP then contributed the land to the partnership at an agreed value of $9.6 million, which amount was to be amortized and paid to MWP in the form of income and cash flow preferences. The transaction was reviewed and approved by the Independent Directors Committee of the Company’s Board of Directors.

In connection with the transaction, BBE built and paid for all improvements on the land. The total cost of the R&D buildings, exclusive of specified tenant improvements obligations, was approximately $11.4 million. Hellyer LP issued a note for the amount of those construction costs to BBE, which note was secured by the buildings.

Because RPC’s interest in Hellyer LP was attributable solely to its commitment to obtain Stellex as a tenant for the property, the partnership agreement provided that if a payment default occurred within the first five years of the Stellex lease, RPC would lose 100% of its interest in the partnership, and if a payment default occurred during the second five year period under the lease, RPC would lose 50% of its interest in Hellyer LP.

Pursuant to RPC’s commitment to Hellyer LP, Stellex executed a lease agreement obligating Stellex, among other things, to pay monthly rent starting at $1.60 per square foot on a triple net basis for 15 years and to reimburse BBE for the tenant improvement obligations, which ultimately totaled approximately $10.5 million.

Under the lease terms, Stellex was obligated to reimburse BBE in full for the tenant improvement costs no later than August 25, 2000. Several days before the due date, representatives of Stellex met with representatives of MWP and informed them that Stellex could not pay the balance due BBE. Stellex requested MWP immediately to draw down the letter of credit as a result of default on the tenant improvement payment required under the lease.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

On September 1, 2000, MWP, as the general partner of Hellyer LP, ceased all allocations of income and cash flow to RPC and exercised the right under the partnership agreement to cancel RPC’s entire interest in the partnership. Following discussions with and approval by the Independent Directors Committee, the Company authorized the transfer of RPC’s interest in Hellyer LP to BBE. Under the Berg Land Holdings Option Agreement and the Acquisition Agreement dated as of May 14, 1998, the Independent Directors Committee of the Board of Directors had the right, but not the obligation, to reacquire on behalf of the Company the property interest and the related distributions related to the property interest at any time. The transfer was effective as of September 1, 2000.

In January 2002, Stellex was acquired through its bankruptcy proceeding by a division of Tyco Corporation. In connection with the acquisition of Stellex, the purchaser assumed the lease with Hellyer LP, agreed to comply with all terms of lease and reimbursed BBE for the tenant improvements, as required under the lease agreement and the Bankruptcy Court order.

Since the inception of Hellyer LP, the Company has accounted for the properties owned by the partnership on a consolidated basis, with reductions for the noncontrolling interest held by the noncontrolling partner (first RPC and then BBE). In each period, the Company has accrued amounts payable by Hellyer LP to the noncontrolling interest partner, including BBE prior to payment. BBE’s share of earnings allocated to its 50% noncontrolling interest was approximately $0.8 million, $0.8 million and $0.7 million in 2009, 2008 and 2007, respectively. As of December 31, 2009, accumulated cash flow distributions from Hellyer LP totaling approximately $6.1 million were accrued and distributed to BBE. If the Company’s litigation with RPC (as described under Note 16 below) is ultimately decided in RPC’s favor, the Company anticipates that BBE may be required to return RPC’s former interest in Hellyer LP and all prior distributions to RPC. As a result of this uncertainty, in October 2003, the Company recorded such distributions as an account receivable from BBE, which is included in “Other assets” on the Company’s consolidated balance sheets, with an offsetting account payable to BBE.

In June 2009, the superior court issued a tentative decision that concluded RPC is a partner in the Hellyer LP relating to the Mission West Properties, L.P. v. Republic Properties Corporation litigation. Because RPC’s interest in the Hellyer LP was transferred to BBE and past distributions from profits were paid to BBE, the Company accrued approximately $1.0 million in interest receivable due from BBE. The $1.0 million interest income accrual was calculated at an interest rate of LIBOR plus 1.25%. In September 2009, the superior court issued a final decision and entry of judgment in favor of RPC. A motion for new trial is pending. In October 2009, the Company deposited with the clerk of the Santa Clara County Superior Court a check in the amount of approximately $14.0 mil lion. Of this amount, $9.3 million represents the amount owed to RPC and $4.7 million represents a deposit to appeal the court’s final decision in the litigation.

The Independent Directors Committee of the Board of Directors has exercised the right to acquire on behalf of the Company the former RPC interest and related distributions from BBE under the terms of the Berg Land Holdings Option Agreement between the Company and the Berg Group if the litigation is ultimately decided in favor of the Company.

Acquisition of Carl E. Berg’s Interest in Unconsolidated Joint Venture

In July 1999, TBI, an unrelated party, advised Carl E. Berg that TBI had an option to purchase approximately 78.89 acres of unimproved land zoned for R&D development in Morgan Hill at $2.50 per square foot that would expire in approximately six months. TBI offered Mr. Berg a 50% interest in the development of this land if Mr. Berg provided 100% financing for the land at 0% interest for three years. Mr. Berg advised TBI of his obligation to offer all R&D development opportunities on the West Coast to the Company and further advised TBI that the Company’s Independent Directors Committee must approve the acquisition of any properties and that the Company’s policy was only to acquire properties that are leased pursuant to the Berg Land Holdings Option Agreement. The development joint ve nture between TBI and the Berg Group proceeded on that basis. Building construction was financed through loans facilitated by the Berg Group. In early 2003, TBI formed TBI-MWP, a new limited partnership, to own all the leased buildings. The Berg Group offered its 50% non-controlling limited partnership interest in TBI-MWP to the Company at cost plus an annual interest rate of 7% on the funds advanced by the Berg Group which amounted to $1.8 million. The Independent Directors Committee and the Berg Group agreed to use a 7% interest rate instead of the rate and fees specified in the Berg Land Holdings Option Agreement because the transaction differed from the standard build-to-suit development specified under that agreement. TBI-MWP owned four fully leased buildings totaling approximately 593,000 rentable square feet. The buildings were subject to mortgage loans totaling approximately $53.6 million. The Independent Directors Committee approved the Company’s acquisition of the Berg Group’s 50% interest in the joint venture effective January 1, 2003. The development joint venture between the Berg Group and TBI retained two vacant shell R&D buildings and five unimproved lots. In April 2003, Comcast, Inc. offered to purchase one of the vacant buildings and two acres of adjoining land from the development joint venture for net proceeds of $2.8 million, after debt repayment. Prior to sale of the property, TBI-MWP acquired this property at no cost under the terms of the Berg Land Holdings Option Agreement, and the Company received a net distribution of $1.4 million from the sale. The transaction was approved by the Independent Directors Committee. The Berg Group continues to own a 50% interest in the remaining vacant building and five unimproved lots. In July 2006, TBI-MWP sold one R&D property with approximately 126,400 rentable square feet for approximately $8.5 million. The total gain on the sale was approximately $0.9 million of which $0.45 million was the Company’s share. In November 2008, TBI-MWP sold two R&D properties with approximately 311,200 rentable square feet for approximately $65 million. The total gain on the sale was approximately $40.9 million of which approximately $20.5 million was the Company’s share. TBI-MWP currently owns one fully leased R&D building totaling approximately 155,500 rentable square feet.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

Berg Controlled Entities have Financial Interests in Certain Tenants that Lease Space from the Company

During the years ended December 31, 2009, 2008 and 2007, Carl E. Berg or entities controlled by Mr. Berg held financial interests in several companies that lease space from the operating partnerships, which include companies where Mr. Berg has a greater than 10% ownership interest. These related party tenants contributed approximately $1,118, $1,218 and $1,227 in rental income in 2009, 2008 and 2007, respectively. Under the Company’s Charter, bylaws and agreements with the Berg Group, the individual members of the Berg Group are prohibited from acquiring shares of the Company’s common stock if such acquisition would result in their beneficial ownership percentage of the Company’s common stock causing the Company to violate any REIT qualification requirement, and currently their share ownership is below a level at wh ich rent from related party tenants would be excluded in determining compliance with REIT qualification tests.

Berg Group Commitment to Complete Future Improvements and Building in Connection with Certain Acquisitions from the Berg Group under the Berg Land Holdings Option Agreement

In connection with the Company’s 2002 acquisition of 5345 Hellyer Avenue in San Jose, California the Berg Group made an approximately $2,529 commitment to the Company to complete certain tenant improvements. The Company recorded this portion of its purchase consideration paid to the Berg Group in “Other assets” on its consolidated balance sheets. The Berg Group satisfied this commitment in late 2008. The Company reclassified approximately $2,529 from “Other assets” to tenant improvements and started depreciation of the asset over the remaining lease term effective January 1, 2009.

The Berg Group has an approximately $7,494 commitment to complete an approximately 75,000 to 90,000 square foot building in connection with the Company’s 2001 acquisition of 245 Caspian Drive in Sunnyvale, California which is comprised of approximately three acres of unimproved land. The Company recorded this portion of its purchase consideration paid to the Berg Group in “Other assets” on its consolidated balance sheets. The Berg Group plans to satisfy this commitment to construct a building when requested by the Company following the approval of the Independent Directors Committee.

Leasing and Overhead Reimbursements Provided by Berg Controlled Entity

The Company currently leases office space owned by Berg & Berg Enterprises for the Company’s headquarters. Rental amount and overhead reimbursements paid to Berg & Berg Enterprises, Inc. were approximately $120, $114 and $95 for the years ended December 31, 2009, 2008 and 2007.

14.	FUTURE MINIMUM RENTS

The Company, through the operating partnerships, owns interests in 111 R&D properties that are leased to tenants under net operating leases with initial terms extending to the year 2020, and are typically subject to fixed increases. Generally, the leases grant tenants renewal options. Future minimum rentals under non-cancelable operating leases as of December 31, 2009, excluding tenant reimbursements of expenses, are as follows:

Year	Minimum Rent
	(dollars in thousands)
2010	$	83,513
2011		78,103
2012		62,033
2013		52,037
2014		40,987
Thereafter		45,349
Total	$	362,022

15.	SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was approximately $22,507, $20,712 and $20,617 for the years ended December 31, 2009, 2008 and 2007, respectively.

Amounts of approximately $15,791, $21,055 and $16,832 were accrued for dividends and distributions to common stockholders and O.P. Unit holders for the years ended December 31, 2009, 2008 and 2007, respectively.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

Amounts of approximately $54,154, $59,888 and $50,189 were accrued or paid to the Berg Group for distributions declared to O.P. Unit holders during the years ended December 31, 2009, 2008 and 2007, respectively.

For the years ended December 31, 2009, 2008 and 2007, 2,122,000, 6,970 and 220,500 O.P. Units were exchanged for 2,122,000, 6,970 and 220,500 shares of the Company’s common stock, respectively, under the terms of the Exchange Rights Agreement among the Company and all limited partners of the operating partnerships. These non-cash transactions were valued at approximately $15,844, $66 and $2,855 for the years ended December 31, 2009, 2008 and 2007, respectively, based on the market closing price on the day of the transactions.

In connection with a property acquisition from the Berg Group, the Company issued a short-term note payable for approximately $19,068 in 2008. The interest rate on this note was LIBOR plus 2.00%. For the year ended December 31, 2008, interest expense incurred in connection with this short-term note was approximately $248. The Company fully repaid the balance and interest due as of December 31, 2008.

In connection with a property acquisition from the Berg Group, the Company issued 548,236 O.P. Units for a total acquisition value of approximately $6,603 for the year ended December 31, 2007.

16.	COMMITMENTS AND CONTINGENCIES

The Company and the operating partnerships, from time to time, are parties to litigation arising out of the normal course of business. The Company is currently involved in the following legal proceedings, and does not believe the ultimate outcome of any of these proceedings will have a material adverse effect on its financial condition or operating results.

Mission West Properties, L.P. v. Republic Properties Corporation, et al. Santa Clara County Superior Court, Case No. CV 796249. In February 2001, while a related case in Maryland was pending, the Company filed a suit against Republic Properties Corporation (“RPC”) in the Superior Court of the State of California for the County of Santa Clara, Case No. CV 796249. The case was stayed pending resolution of the Maryland case, and the Company dismissed its suit on March 4, 2005. In April 2005, RPC submitted a motion asking the superior court to reinstate the case, which the court granted on May 25, 2005. In April 2006, the Maryland case was dismissed by the highest court in Maryland for lack of personal jurisdiction. On July 5, 2006, RPC filed a cro ss-complaint in the case seeking partnership distributions to which the Company demurred. The court sustained the Company’s demurrer with leave to amend. Subsequently, RPC filed an amended complaint and the Company submitted another demurrer seeking dismissal of the claims on statute of limitations grounds. On February 20, 2007, the Court overruled the Company’s demurrer. The Company sought a writ from the California State Court of Appeal for the Sixth District to direct the lower court to reverse its decision, but the petition for the writ was denied. In April 2008, the Company filed a motion for summary judgment in the California Superior Court which was denied. In October 2008, a motion filed by RPC for summary judgment in the California Superior Court was denied. A trial in the California Superior Court commenced in February 2009. On June 11, 2009, the superior court issued a tentative decision that concluded RPC is a partner in the Hellyer LP and is entitled to distribution of pro fits of the Hellyer LP in accordance with its percentage interest together with pre-judgment interest on each distribution from the date it was due and payable. On September 17, 2009, the superior court issued a final decision and entry of judgment in favor of RPC in the amount of approximately $6,625, together with pre-judgment interest of 10% through September 3, 2009 in the sum of $2,692, for a total of approximately $9,317. As a result, the Company recorded an additional $469 in interest expense. The Company filed an appeal following the court’s issuance of a final decision and entry of judgment. A motion for new trial is pending. On October 5, 2009, the Company deposited with the clerk of the Santa Clara County Superior Court a check in the amount of approximately $13,975, of which approximately $4,658, or 50% of $9,317, was a deposit to appeal the court’s final decision. The additional $4,658 appeal deposit is refundable regardless of the outcome of the appeal process. Pending the outcome o f the appeal, the Company has accrued in the aggregate of approximately $3,003 in interest payable on the amount of past distributions that would be payable to RPC by Hellyer LP based on the judgment determined at the legal rate of interest of 10%. In addition, the Company has accrued approximately $1,021 in interest receivable due from Berg & Berg Enterprises, Inc. because past distributions with respect to RPC’s interest in Hellyer LP were paid to Berg & Berg Enterprises, Inc., which interest income accrual was calculated at an interest rate of LIBOR plus 1.25%.

Guarantees

Under its articles of incorporation and bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director’s serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and has recorded no liabilities for these agreements as of December 31, 2009.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

The Company also enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with lenders, joint venture partners, contractors, and tenants. Under these provisions the Company typically agrees to indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of certain kinds of activities or inactions of the Company. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes th e estimated fair value of these agreements is minimal. Accordingly, the Company has recorded no liabilities for these agreements as of December 31, 2009.

Seismic Activity

The Company’s properties are located in an active seismic area of Silicon Valley. Insurance policies currently maintained by the Company do not cover seismic activity, although they do cover losses from fires after an earthquake.

Environmental Issues

The environmental investigations that have been conducted on the Company’s properties have not revealed any environmental liability that it believes would have a material adverse effect on its financial condition, results of operations and assets. To the extent any environmental report or investigation reveals environmental issues, the tenant is responsible for the cost of any remediation under the terms and conditions of the Company’s lease agreement and the law. Nonetheless, it is possible that there are material environmental liabilities of which the Company is unaware. The Company cannot assure you that future laws, ordinances, or regulations will not impose any material environmental liability, or that the current environmental condition of the properties has not been, or will not be, affected by tenants and occupant s of the properties, by the condition of properties in the vicinity of the properties, or by third parties unrelated to the Company.

Asset Disposition Subject to Certain Conditions

The Company entered into a sales agreement in 2007 with unrelated parties for the McCandless property, subject to numerous material conditions, including but not limited to re-zoning of the property and negotiating certain agreements with the local municipality acceptable to the buyer. As a result of continued weakness in the housing and credit markets, the buyer is no longer pursuing this acquisition and is out of contract. The $2,000 earnest money deposit was forfeited and the Company recorded the amount in other income.

17.	REAL ESTATE ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS

The Company follows the accounting provision and reporting for the impairment and disposal of long lived assets. In general, income or loss attributable to the operations and sale of property and the operations related to property held for sale are classified as discontinued operations in the consolidated statements of operations. Prior period consolidated statements of operations presented in this report have been reclassified to reflect the income or loss related to properties that were held for sale or sold and presented as discontinued operations for the years ended December 31, 2009, 2008 and 2007. Additionally, all periods presented in this report will likely require further reclassification in future periods if additional properties are held for sale or property sales occur.

As of December 31, 2009, there were no properties under contract to be sold or otherwise disposed of which would qualify as assets held for sale.

In 2007, the Company sold two R&D properties for a total sales price of approximately $16,043 resulting in a net gain of approximately $6,529. Results of operations for these properties for the year ended December 31, 2007 are as follows:

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

	Year Ended
	December 31, 2007
	(dollars in thousands)
Revenues:
Rental income	$	389
Tenant reimbursements		83
Other income		1
Total operating revenues		473

Expenses:
Property operating, maintenance and real estate taxes		233
Depreciation		148
Total operating expenses		381

Operating income		92

Other income (expenses):
Interest		(1	)
Net income attributable to discontinued operations		91
Net gain on disposal of discontinued operations		6,529
Income from discontinued operations	$	6,620

For the year ended December 31, 2007, income from discontinued operations included results of operations from two R&D properties sold in 2007.

18.	ACQUISITION-RELATED INTANGIBLE ASSETS

In February 2008, the Company acquired a fully leased office/R&D building at 2904 Orchard Parkway in San Jose, California for approximately $16,696 from an unrelated party. The purchase price was allocated to long-lived assets and the value of an in-place lease as follows:

Land	$	4,704
Buildings and improvements		10,871
In-place lease		1,121
Total cash purchase price	$	16,696

The result of operations for this property acquisition has been included in the Company’s consolidated statements of operations since the date of acquisition. The intangible assets are being amortized over the applicable remaining lease term. Amortization expense related to in-place leases of approximately $637, $600 and $2,153 was recorded for the years ended December 31, 2009, 2008 and 2007, respectively.

Details of real estate related intangible assets at December 31, 2009 and 2008 are as follows:

	December 31,
	2009			2008
	(dollars in thousands)
Amortizable intangible assets:
In-place leases	$	3,240		$	3,240
Accumulated amortization		(1,978	)		(1,341	)
Net real estate related intangible assets	$	1,262		$	1,899

The estimated aggregate amortization expense for the real estate related intangible assets for the remaining fiscal years is as follows:

Year	Estimated In-place Lease Amortization (expense)
	(dollars in thousands)
2010	$	637
2011		363
2012		224
2013		38
Total	$	1,262

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

19.	FAIR VALUE OF RESTRICTED INVESTMENT IN MARKETABLE SECURITIES

In accordance with the accounting provision for certain investments in debt and equity securities, investments in debt and equity “marketable” securities are classified at acquisition, and on subsequent reporting dates, into one of the following categories: (a) Trading Securities - debt and equity securities purchased and held principally for the purpose of selling them in the near future. (b) Available-for-Sale Securities - debt securities not classified as held-to-maturity, and debt and equity securities not classified as trading securities. (c) Held-to-Maturity Debt Securities - those debt securities for which the company has the “positive intent and ability to hold the securities to maturity.”

The Company’s restricted investment in marketable securities on December 31, 2009 was classified as trading securities, whereas unrealized holdings gains and losses (differences between the initial cost and the fair value at the balance sheet date) are included in net income of the current period, and interest and dividend revenue, as well as realized gains and losses on sales, are included in net income of the current period. The marketable securities are classified as Level 1 of the fair value hierarchy in accordance with the accounting provision for fair value measurements and disclosures and thus measured at fair value using quoted market prices for identical instruments in active markets from an independent third party source.

The only financial asset or liability recorded at fair value in the Company’s consolidated financial statements is the restricted investment in marketable securities, which was funded by the Company’s restricted cash through its VIE. The restricted marketable securities are an investment of a real estate investment trust company traded on the New York Stock Exchange Euronext. The Company determined the fair value for the marketable securities using quoted prices in active markets for identical securities (Level 1 – see Note 2 under New Accounting Pronouncements). As of December 31, 2009, the fair value of the marketable securities totaled approximately $12,069, including dividends, and the cost thereof was approximately $6,610. The marketable securities ar e adjusted to fair value at the end of each accounting period, with the corresponding gain and loss recorded in unrealized gain or loss from investment. For the years ended December 31, 2009 and 2008, the Company recorded net unrealized gain (loss) of approximately $5,011 and ($278), respectively, related to the increase or decrease in fair value of the marketable securities, which was reported in unrealized gain (loss) from investment in the Company’s consolidated statement of operations.

20.	SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)

Quarterly financial information for the year ended December 31, 2009 (1) is as follows:

	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	(Unaudited)
Rental income	$	20,655	$	20,424	$	20,442	$	20,999
Operating income	$	13,348	$	10,812	$	11,995	$	14,547
Net income	$	5,634	$	7,189	$	11,242	$	10,384
Net income available to common stockholders	$	1,432	$	1,785	$	2,766	$	2,409
Per share data:
Basic net income per share	$	0.07	$	0.08	$	0.13	$	0.11
Diluted net income per share	$	0.07	$	0.08	$	0.13	$	0.11
Weighted average shares of common stock (basic)		21,614,878		21,766,343		21,770,211		21,793,037
Weighted average shares of common stock (diluted)		21,770,489		21,899,906		21,902,387		21,979,442

Quarterly financial information for the year ended December 31, 2008 (1) is as follows:

	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	(Unaudited)
Rental income	$	18,996	$	19,359	$	20,256	$	20,464
Operating income	$	13,545	$	11,452	$	12,952	$	12,436
Net income	$	9,121	$	6,837	$	7,939	$	26,443
Net income available to common stockholders	$	1,882	$	1,359	$	1,635	$	5,257
Per share data:
Basic net income per share	$	0.10	$	0.07	$	0.08	$	0.27
Diluted net income per share	$	0.10	$	0.07	$	0.08	$	0.26
Weighted average shares of common stock (basic)		19,667,605		19,695,988		19,745,141		19,748,211
Weighted average shares of common stock (diluted)		19,667,605		19,902,304		19,783,507		19,889,016

(1)	The summation of the quarterly financial data may not equal the annual number reported on the consolidated statements of operations due to rounding differences.

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Dollars in thousands, except per share data)

21.	SUBSEQUENT EVENTS

On January 7, 2010, the Company paid dividends of $0.15 per share of common stock to all common stockholders of record as of December 31, 2009. On the same date, the operating partnerships paid a distribution of $0.15 per O.P. Unit to all O.P. Unit holders, with the exception of the Berg Group as discussed below. Aggregate dividends and distributions amounted to approximately $15,791.

On January 7, 2010, a short-term note payable in the aggregate amount of approximately $20,842 was issued to the Berg Group in connection with the fourth quarter 2009 dividend distributions and the loan amount outstanding at December 31, 2009. The note payable bears interest at LIBOR plus 1.75%. The loan was approved by the Independent Directors Committee of the Company’s Board of Directors.

On January 7, 2010, the Company borrowed $5,000 from the Berg Group to fund a property acquisition and other working capital requirements. The loan was approved by the Independent Directors Committee of the Company’s Board of Directors.

On January 8, 2010, the Company acquired one leased R&D/office property from an unrelated third party comprised of approximately 41,000 rentable square feet located at 1040-1050 La Avenida Street in Mountain View, California for approximately $3,853.

On February 3, 2010, the Company granted stock options to purchase a total of 171,000 shares of common stock to an employee. Of the total grant, options to purchase 85,500 shares vested immediately and options to purchase 85,500 shares vest monthly for 24 months, subject to continued employment with the Company. Each option grant has an exercise price of $6.99 per share and has a term of six years from the date of grant. The estimated fair value of the options was $0.43 per share on the date of grant. Compensation expense will be charged to earnings over the respective vesting period.

On February 18, 2010, the Company borrowed $13,100 from the Berg Group to pay down the HBC line of credit balance because the interest rate with the Berg Group was lower than the rate charged by HBC. The interest rate on the Berg Group loan is LIBOR plus 1.75%, while the interest rate on the HBC line of credit is 4.00%. The loan was approved by the Independent Directors Committee of the Company’s Board of Directors. Total year to date short-term debt owed to the Berg Group is now approximately $33,942, net of repayments.

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

Board of Directors and Stockholders

Mission West Properties, Inc.

Cupertino, California

The audit referred to in our report dated March 16, 2010 relating to the consolidated financial statements of Mission West Properties, Inc., which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index as of December 31, 2009 and 2008. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based upon our audit.

In our opinion such financial statement schedule as of December 31, 2009 and 2008 presents fairly, in all material respects, the information set forth therein.

\S\ Burr Pilger Mayer, Inc.

San Francisco, California

March 16, 2010

INTENTIONALLY BLANK

MISSION WEST PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation and Amortization
December 31, 2009
(dollars in thousands)
				Initial Cost			Total Cost
						Cost
					Buildings	Subsequent to		Buildings		Accumulated
			December 31, 2009		and	Construction/		and		Depreciation	Date of	Depreciable
Property Name	City		Encumbrances	Land	Improvements	Acquisition	Land	Improvements	Total	& Amortization	Acquisition	Life
5300-5350 Hellyer Avenue	San Jose	C	$8,261	$5,742	$11,442		$5,742	$11,442	$17,184	$2,753	5/00	M
10401-10411 Bubb Road	Cupertino	A		633	3,078		633	3,078	3,711	887	7/98	M
45365 Northport Loop	Fremont			2,447	5,711	$11	2,447	5,722	8,169	1,332	10/00	M
45738 Northport Loop	Fremont	F		891	4,338	5	891	4,343	5,234	1,251	7/98	M
4050 Starboard Drive	Fremont	F		1,329	6,467	8	1,329	6,475	7,804	1,864	7/98	M
3501 W. Warren Ave/Fremont Blvd	Fremont			1,866	9,082	1,382	1,866	10,464	12,330	3,917	7/98	M
48800 Milmont Blvd	Fremont			1,013	4,932		1,013	4,932	5,945	1,419	7/98	M
4750 Patrick Henry Drive	Santa Clara	H		1,604	7,805	405	1,604	8,210	9,814	2,660	7/98	M
3520 Bassett Street	Santa Clara	D		1,104	5,371		1,104	5,371	6,475	1,545	7/98	M
3530 Bassett Street	Santa Clara	B,D		849	4,133		849	4,133	4,982	1,190	7/98	M
5850-5870 Hellyer Avenue	San Jose			2,787	6,502	131	2,787	6,633	9,420	1,900	11/98	M
5750 Hellyer Avenue	San Jose			3,266	3,354	2,798	3,266	6,152	9,418	1,742	8/01	M
800 Embedded Way	San Jose	L		1,794	-		1,794	-	1,794	-	3/00	-
5500 Hellyer Avenue	San Jose	F		4,735	12,485	1,545	4,735	14,030	18,765	3,024	2/01	M
5550 Hellyer Avenue	San Jose	F		3,261	3,478	3,755	3,261	7,233	10,494	1,812	6/01	M
5400 Hellyer Avenue	San Jose			3,238	5,007	215	3,238	5,222	8,460	1,406	7/00	M
5325 Hellyer Avenue	San Jose	H		4,684	10,230	40	4,684	10,270	14,954	2,350	1/01	M
5345 Hellyer Avenue	San Jose	H		4,866	5,822	2,529	4,866	8,351	13,217	1,607	1/02	M
5905-5965 Silver Creek Valley Road	San Jose			8,437	17,316	46	8,437	17,362	25,799	3,682	7/01	M
5905-5965 Silver Creek Valley Road	San Jose			3,438	2,727		3,438	2,727	6,165	562	10/01	M
5845 Hellyer Avenue	San Jose			6,090	5,029		6,090	5,029	11,119	290	9/07	M
855 Embedded Way	San Jose			3,289	6,521	60	3,289	6,581	9,870	1,480	5/01	M
1065-1105 La Avenida Street	Mountain View			46,832	109,275	65	46,832	109,340	156,172	29,383	4/99	M
1875 Charleston Road	Mountain View	N		-	2,615		-	2,615	2,615	707	4/06	M
1750 Automation Parkway	San Jose	G		4,789	11,174	315	4,789	11,489	16,278	3,016	7/99	M
1756 Automation Parkway	San Jose	G		4,378	10,216	704	4,378	10,920	15,298	2,759	1/00	M
1762 Automation Parkway	San Jose	G		4,804	12,224	1,332	4,804	13,556	18,360	3,454	4/00	M
1768 Automation Parkway	San Jose	H		8,195	19,121	218	8,195	19,339	27,534	4,525	12/00	M
255 Caspian Drive	Sunnyvale			3,491	7,160	1,658	3,491	8,818	12,309	2,546	4/00	M
245 Caspian Drive	Sunnyvale			5,894	-		5,894	-	5,894	-	4/01	-
5981 Optical Court	San Jose	F		4,054	14,938	298	4,054	15,236	19,290	1,754	1/08	M
5970 Optical Court	San Jose			2,758	8,395		2,758	8,395	11,153	1,259	12/03	M
5900 Optical Court	San Jose			3,634	12,677	83	3,634	12,760	16,394	2,460	7/02	M
2630 Orchard Parkway	San Jose			2,932	5,863	22	2,932	5,885	8,817	1,170	3/02	M
2610 Orchard Parkway	San Jose	K		2,615	5,231		2,615	5,231	7,846	1,025	3/02	M
55 West Trimble Road	San Jose	K		4,435	8,869		4,435	8,869	13,304	1,738	3/02	M
2001 Walsh Avenue	Santa Clara	E,G,J		4,610	3,887		4,610	3,887	8,497	661	4/03	M
2880 Scott Blvd	Santa Clara	E,H,J		14,501	22,555	471	14,501	23,026	37,527	3,911	4/03	M
2890 Scott Blvd	Santa Clara	E,H,J		3,081	9,696	25	3,081	9,721	12,802	1,648	4/03	M
2770-2800 Scott Blvd	Santa Clara	E,H		7,138	7,075	170	7,138	7,245	14,383	1,295	4/03	M
2300 Central Expressway	Santa Clara	E,G,J		2,390	2,459	50	2,390	2,509	4,899	423	4/03	M
2220 Central Expressway	Santa Clara	E,G,J		3,305	3,427	816	3,305	4,243	7,548	1,040	4/03	M
2330 Central Expressway	Santa Clara	E,G		3,673	3,932	692	3,673	4,624	8,297	1,340	4/03	M
233 South Hillview Drive	Milpitas	F,O		3,335	10,076		3,335	10,076	13,411	1,869	3/06	M
2251 Lawson Lane	Santa Clara			1,952	9,498	622	1,952	10,120	12,072	2,865	7/98	M
1230 East Arques	Sunnyvale	F		540	2,628	39	540	2,667	3,207	799	7/98	M
1250 East Arques	Sunnyvale	F		1,335	6,499		1,335	6,499	7,834	1,869	7/98	M
20400 Mariani Avenue	Cupertino			1,670	8,125	946	1,670	9,071	10,741	2,790	7/98	M
10500 De Anza Blvd	Cupertino			7,666	37,304		7,666	37,304	44,970	10,729	7/98	M
20605-20705 Valley Green Drive	Cupertino	G		3,490	16,984		3,490	16,984	20,474	4,886	7/98	M
10300 Bubb Road	Cupertino	F		635	3,090		635	3,090	3,725	890	7/98	M
10440 Bubb Road	Cupertino			434	2,112	114	434	2,226	2,660	715	7/98	M
10460 Bubb Road	Cupertino	H		994	4,838	1,279	994	6,117	7,111	1,899	7/98	M
1135 Kern Avenue	Sunnyvale			407	1,982		407	1,982	2,389	573	7/98	M
450 National Avenue	Mountain View			611	2,973	72	611	3,045	3,656	910	7/98	M
3301 Olcott Street	Santa Clara			1,846	8,984	37	1,846	9,021	10,867	2,608	7/98	M
2800 Bayview Avenue	Fremont			1,070	5,205	60	1,070	5,265	6,335	1,558	7/98	M
5521 Hellyer Avenue	San Jose			4,534	9,650		4,534	9,650	14,184	1,465	2/05	M
6850 Santa Teresa Blvd	San Jose	H		377	1,836	819	377	2,655	3,032	1,004	7/98	M
6810 Santa Teresa Blvd	San Jose	H		2,567	5,991	772	2,567	6,763	9,330	2,067	3/99	M
140-160 Great Oaks Blvd	San Jose			1,402	6,822	754	1,402	7,576	8,978	2,437	7/98	M
6541 Via del Oro/6385 San Ignacio	San Jose	G		1,039	5,057	81	1,039	5,138	6,177	1,520	7/98	M
6311-6351 San Ignacio Avenue	San Jose	F		6,246	30,396	170	6,246	30,566	36,812	8,910	7/98	M
6320-6360 San Ignacio Avenue	San Jose	G		2,616	12,732	439	2,616	13,171	15,787	3,887	7/98	M
75 E. Trimble Road/2610 N. First St	San Jose			3,477	16,919	85	3,477	17,004	20,481	4,955	7/98	M
2904 Orchard Parkway	San Jose	F,P		4,704	11,992		4,704	11,992	16,696	909	2/08	M
3236 Scott Blvd	Santa Clara	F		1,234	6,005		1,234	6,005	7,239	1,728	7/98	M
1212 Bordeaux Lane	Sunnyvale	F		2,250	10,948		2,250	10,948	13,198	3,150	7/98	M
1325-1810 McCandless Drive	Milpitas			13,994	66,213	1,455	13,994	67,668	81,662	19,988	7/98	M
1600 Memorex Drive	Santa Clara	I		1,221	5,940	11	1,221	5,951	7,172	1,696	7/98	M
1688 Richard Avenue	Santa Clara	I		1,248	2,913	6	1,248	2,919	4,167	843	9/98	M
1700 Richard Avenue	Santa Clara	I		1,727	4,030		1,727	4,030	5,757	1,053	8/99	M
Morgan Hill Land	Morgan Hill			25,543	-		25,543	-	25,543	-	3/07	-
Morgan Hill Land	Morgan Hill			2,297	-		2,297	-	2,297	-	4/07	-
300 Montague Expressway	Milpitas			2,609	2,499		2,609	2,499	5,108	167	4/07	M
337 Trade Zone Blvd	Milpitas			2,264	2,168		2,264	2,168	4,432	145	4/07	M
324-368 Montague Expressway	Milpitas			2,968	2,843		2,968	2,843	5,811	190	4/07	M
3506-3510 Bassett Street	Santa Clara	D		943	4,591	182	943	4,773	5,716	1,450	7/98	M
3540-3544 Bassett Street	Santa Clara	F,D		1,565	7,616	261	1,565	7,877	9,442	2,274	7/98	M
3550 Bassett Street	Santa Clara	F,D		1,079	5,251	33	1,079	5,284	6,363	1,546	7/98	M
3560 Bassett Street	Santa Clara	F,D		1,075	5,233	8	1,075	5,241	6,316	1,515	7/98	M
3570-3580 Bassett Street	Santa Clara	F,D		1,075	5,233		1,075	5,233	6,308	1,507	7/98	M
Hartford Loan		F	111,485
Northwestern Mutual Life Insurance Company		G	77,444
Allianz Life Insurance Company		H	129,889
Heritage Bank of Commerce Line of Credit			14,466
			$341,545	$320,911	$774,795	$28,094	$320,911	$802,889	$1,123,800	$204,153

(A) 16.67% of this property’s ownership is held by unaffiliated parties outside the operating partnerships of the Company.

(B) 25% of this property’s ownership is held by unaffiliated parties outside the operating partnerships of the Company.

(D) Part of the property group referred to as the Triangle Technology Park.

(E) Part of the property group referred to as the San Tomas Technology Park.

(F) Encumbered by the $111,485 Hartford loan - full amount of loan shown at the bottom of the schedule.

(G) Encumbered by the $77,444 Northwestern Mutual Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.

(H) Encumbered by the $129,889 Allianz Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.

(I) Encumbered by the $14,466 Heritage Bank of Commerce Line of Credit loan - full amount of loan shown at the bottom of the schedule.

(J) Purchase price allocated to real estate related intangible assets amounted to $18,284. Approximately $17,410 and $874 was fully amortized in 2007 and 2005, respectively, and the asset cost and its related accumulated amortization was removed from the accounts.

(K) Purchase price allocated to real estate related intangible assets amounted to $1,367. The amount was fully amortized in 2004 and the asset cost and its related accumulated amortization was removed from the accounts.

(L) This property was sold in October 2005. The Company retained 32.5%, or approximately 7.9 acres, of raw land.

(M) Depreciation is computed based on the following estimated lives:

1. Building shell and base building tenant improvements of newly acquired properties are being depreciated on a weighted average composite useful life of 40 years.

2. Real estate intangible assets allocated are being amortized over the remaining life of the underlying leases.

3. Tenant improvements, furniture and fixtures are being depreciated over their estimated useful lives ranging from 5 to 10 years.

(N) Purchase price allocated to real estate related intangible assets amounted to $745.

(O) Purchase price allocated to real estate related intangible assets amounted to $1,374.

(P) Purchase price allocated to real estate related intangible assets amounted to $1,121.

MISSION WEST PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation and Amortization
December 31, 2008
(dollars in thousands)
				Initial Cost			Total Cost
						Cost
					Buildings	Subsequent to		Buildings		Accumulated
			December 31, 2008		and	Construction/		and		Depreciation	Date of	Depreciable
Property Name	City		Encumbrances	Land	Improvements	Acquisition	Land	Improvements	Total	& Amortization	Acquisition	Life
5300-5350 Hellyer Avenue	San Jose	C	$8,761	$5,742	$11,442		$5,742	$11,442	$17,184	$2,467	5/00	L
10401-10411 Bubb Road	Cupertino	A		633	3,078		633	3,078	3,711	810	7/98	L
45365 Northport Loop	Fremont			2,447	5,711	$11	2,447	5,722	8,169	1,189	10/00	L
45738 Northport Loop	Fremont	F		891	4,338	5	891	4,343	5,234	1,143	7/98	L
4050 Starboard Drive	Fremont	F		1,329	6,467	8	1,329	6,475	7,804	1,702	7/98	L
3501 W. Warren Ave/Fremont Blvd	Fremont			1,866	9,082	1,382	1,866	10,464	12,330	3,656	7/98	L
48800 Milmont Blvd	Fremont			1,013	4,932		1,013	4,932	5,945	1,296	7/98	L
4750 Patrick Henry Drive	Santa Clara	H		1,604	7,805	405	1,604	8,210	9,814	2,390	7/98	L
3520 Bassett Street	Santa Clara	D		1,104	5,371		1,104	5,371	6,475	1,411	7/98	L
3530 Bassett Street	Santa Clara	B,D		849	4,133		849	4,133	4,982	1,086	7/98	L
5850-5870 Hellyer Avenue	San Jose			2,787	6,502	131	2,787	6,633	9,420	1,715	11/98	L
5750 Hellyer Avenue	San Jose			3,266	3,354	2,798	3,266	6,152	9,418	1,312	8/01	L
800 Embedded Way	San Jose	K		1,794	-		1,794	-	1,794	-	3/00	-
5500 Hellyer Avenue	San Jose	F		4,735	12,485	1,575	4,735	14,060	18,795	2,515	2/01	L
5550 Hellyer Avenue	San Jose	F		3,261	3,478	3,755	3,261	7,233	10,494	966	6/01	L
5400 Hellyer Avenue	San Jose			3,238	5,007	215	3,238	5,222	8,460	1,281	7/00	L
5325 Hellyer Avenue	San Jose	H		4,684	10,230	40	4,684	10,270	14,954	2,093	1/01	L
5345 Hellyer Avenue	San Jose	H		4,866	5,822	2,529	4,866	8,351	13,217	1,145	1/02	L
5905-5965 Silver Creek Valley Road	San Jose			8,437	17,316		8,437	17,316	25,753	3,247	7/01	L
5905-5965 Silver Creek Valley Road	San Jose			3,438	2,727		3,438	2,727	6,165	494	10/01	L
5845 Hellyer Avenue	San Jose			6,090	5,029		6,090	5,029	11,119	161	9/07	L
855 Embedded Way	San Jose			3,289	6,521	150	3,289	6,671	9,960	1,320	5/01	L
1065-1105 La Avenida Street	Mountain View			46,832	109,275	65	46,832	109,340	156,172	26,649	4/99	L
1875 Charleston Road	Mountain View	M		-	2,615		-	2,615	2,615	519	4/06	L
1750 Automation Parkway	San Jose	G		4,789	11,174	315	4,789	11,489	16,278	2,729	7/99	L
1756 Automation Parkway	San Jose	G		4,378	10,216	704	4,378	10,920	15,298	2,434	1/00	L
1762 Automation Parkway	San Jose	G		4,804	12,224	1,332	4,804	13,556	18,360	2,961	4/00	L
1768 Automation Parkway	San Jose	H		8,195	19,121	218	8,195	19,339	27,534	3,977	12/00	L
255 Caspian Drive	Sunnyvale			3,491	7,160	1,658	3,491	8,818	12,309	2,243	4/00	L
245 Caspian Drive	Sunnyvale			5,894	-		5,894	-	5,894	-	4/01	-
5981 Optical Court	San Jose	F		4,054	14,938	298	4,054	15,236	19,290	874	1/08	L
5970 Optical Court	San Jose			2,758	8,395		2,758	8,395	11,153	1,049	12/03	L
5900 Optical Court	San Jose			3,634	12,677	83	3,634	12,760	16,394	2,133	7/02	L
2630 Orchard Parkway	San Jose			2,932	5,863	22	2,932	5,885	8,817	1,024	3/02	L
2610 Orchard Parkway	San Jose	J		2,615	5,231		2,615	5,231	7,846	894	3/02	L
55 West Trimble Road	San Jose	J		4,435	8,869		4,435	8,869	13,304	1,516	3/02	L
2001 Walsh Avenue	Santa Clara	E,G,I		4,610	3,887		4,610	3,887	8,497	564	4/03	L
2880 Scott Blvd	Santa Clara	E,H,I		14,501	22,555	471	14,501	23,026	37,527	3,300	4/03	L
2890 Scott Blvd	Santa Clara	E,H,I		3,081	9,696	25	3,081	9,721	12,802	1,402	4/03	L
2770-2800 Scott Blvd	Santa Clara	E,H		7,138	7,075	170	7,138	7,245	14,383	1,089	4/03	L
2300 Central Expressway	Santa Clara	E,G,I		2,390	2,459		2,390	2,459	4,849	356	4/03	L
2220 Central Expressway	Santa Clara	E,G,I		3,305	3,427	816	3,305	4,243	7,548	838	4/03	L
2330 Central Expressway	Santa Clara	E,G		3,673	3,932	677	3,673	4,609	8,282	799	4/03	L
233 South Hillview Drive	Milpitas	F,N		3,335	10,076		3,335	10,076	13,411	1,381	3/06	L
2251 Lawson Lane	Santa Clara			1,952	9,498	501	1,952	9,999	11,951	2,503	7/98	L
1230 East Arques	Sunnyvale	F		540	2,628	39	540	2,667	3,207	733	7/98	L
1250 East Arques	Sunnyvale	F		1,335	6,499		1,335	6,499	7,834	1,707	7/98	L
20400 Mariani Avenue	Cupertino			1,670	8,125	946	1,670	9,071	10,741	2,403	7/98	L
10500 De Anza Blvd	Cupertino			7,666	37,304		7,666	37,304	44,970	9,796	7/98	L
20605-20705 Valley Green Drive	Cupertino	G		3,490	16,984		3,490	16,984	20,474	4,462	7/98	L
10300 Bubb Road	Cupertino	F		635	3,090		635	3,090	3,725	813	7/98	L
10440 Bubb Road	Cupertino			434	2,112	114	434	2,226	2,660	650	7/98	L
10460 Bubb Road	Cupertino	H		994	4,838	1,279	994	6,117	7,111	1,748	7/98	L
1135 Kern Avenue	Sunnyvale			407	1,982		407	1,982	2,389	524	7/98	L
450 National Avenue	Mountain View			611	2,973	72	611	3,045	3,656	821	7/98	L
3301 Olcott Street	Santa Clara			1,846	8,984	37	1,846	9,021	10,867	2,376	7/98	L
2800 Bayview Avenue	Fremont			1,070	5,205	60	1,070	5,265	6,335	1,428	7/98	L
5521 Hellyer Avenue	San Jose			4,534	9,650		4,534	9,650	14,184	1,162	2/05	L
6850 Santa Teresa Blvd	San Jose	H		377	1,836	819	377	2,655	3,032	934	7/98	L
6810 Santa Teresa Blvd	San Jose	H		2,567	5,991	772	2,567	6,763	9,330	1,772	3/99	L
140-160 Great Oaks Blvd	San Jose			1,402	6,822	754	1,402	7,576	8,978	2,206	7/98	L
6541 Via del Oro/6385 San Ignacio	San Jose	G		1,039	5,057	81	1,039	5,138	6,177	1,380	7/98	L
6311-6351 San Ignacio Avenue	San Jose	F		6,246	30,396	170	6,246	30,566	36,812	8,143	7/98	L
6320-6360 San Ignacio Avenue	San Jose	G		2,616	12,732	439	2,616	13,171	15,787	3,548	7/98	L
75 E. Trimble Road/2610 N. First St	San Jose			3,477	16,919	85	3,477	17,004	20,481	4,532	7/98	L
2904 Orchard Parkway	San Jose	F,O		4,704	11,992		4,704	11,992	16,696	413	2/08	L
3236 Scott Blvd	Santa Clara	F		1,234	6,005		1,234	6,005	7,239	1,578	7/98	L
1212 Bordeaux Lane	Sunnyvale	F		2,250	10,948		2,250	10,948	13,198	2,877	7/98	L
1325-1810 McCandless Drive	Milpitas			13,994	66,213	1,455	13,994	67,668	81,662	18,258	7/98	L
1600 Memorex Drive	Santa Clara			1,221	5,940	11	1,221	5,951	7,172	1,547	7/98	L
1688 Richard Avenue	Santa Clara			1,248	2,913	6	1,248	2,919	4,167	770	9/98	L
1700 Richard Avenue	Santa Clara			1,727	4,030		1,727	4,030	5,757	952	8/99	L
Morgan Hill Land	Morgan Hill			25,543	-		25,543	-	25,543	-	3/07	-
Morgan Hill Land	Morgan Hill			2,297	-		2,297	-	2,297	-	4/07	-
300 Montague Expressway	Milpitas			2,609	2,499		2,609	2,499	5,108	104	4/07	L
337 Trade Zone Blvd	Milpitas			2,264	2,168		2,264	2,168	4,432	90	4/07	L
324-368 Montague Expressway	Milpitas			2,968	2,843		2,968	2,843	5,811	118	4/07	L
3506-3510 Bassett Street	Santa Clara	D		943	4,591	182	943	4,773	5,716	1,320	7/98	L
3540-3544 Bassett Street	Santa Clara	F,D		1,565	7,616	195	1,565	7,811	9,376	2,070	7/98	L
3550 Bassett Street	Santa Clara	F,D		1,079	5,251	33	1,079	5,284	6,363	1,415	7/98	L
3560 Bassett Street	Santa Clara	F,D		1,075	5,233	8	1,075	5,241	6,316	1,384	7/98	L
3570-3580 Bassett Street	Santa Clara	F,D		1,075	5,233		1,075	5,233	6,308	1,376	7/98	L
Hartford Loan		F	114,513
Northwestern Mutual Life Insurance Company		G	81,308
Allianz Life Insurance Company		H	135,087
			$339,669	$320,911	$774,795	$27,916	$320,911	$802,711	$1,123,622	$180,043

(A) 16.67% of this property’s ownership is held by unaffiliated parties outside the operating partnerships of the Company.

(B) 25% of this property’s ownership is held by unaffiliated parties outside the operating partnerships of the Company.

(D) Part of the property group referred to as the Triangle Technology Park.

(E) Part of the property group referred to as the San Tomas Technology Park.

(F) Encumbered by the $114,513 Hartford loan - full amount of loan shown at the bottom of the schedule.

(G) Encumbered by the $81,308 Northwestern Mutual Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.

(H) Encumbered by the $135,087 Allianz Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.

(I) Purchase price allocated to real estate related intangible assets amounted to $18,284. Approximately $17,410 and $874 was fully amortized in 2007 and 2005, respectively, and the asset cost and its related accumulated amortization was removed from the accounts.

(J) Purchase price allocated to real estate related intangible assets amounted to $1,367. The amount was fully amortized in 2004 and the asset cost and its related accumulated amortization was removed from the accounts.

(K) This property was sold in October 2005. The Company retained 32.5%, or approximately 7.9 acres, of raw land.

(L) Depreciation is computed based on the following estimated lives:

1. Building shell and base building tenant improvements of newly acquired properties are being depreciated on a weighted average composite useful life of 40 years.

2. Real estate intangible assets allocated are being amortized over the remaining life of the underlying leases.

3. Tenant improvements, furniture and fixtures are being depreciated over their estimated useful lives ranging from 5 to 10 years.

(M) Purchase price allocated to real estate related intangible assets amounted to $745.

(N) Purchase price allocated to real estate related intangible assets amounted to $1,374.

(O) Purchase price allocated to real estate related intangible assets amounted to $1,121.

MISSION WEST PROPERTIES, INC.
NOTE TO SCHEDULE III
December 31, 2009, 2008 and 2007
(dollars in thousands)

1. Reconciliation of real estate and accumulated depreciation and amortization:

	2009		2008		2007
Investments in properties:
Balance at beginning of year	$	1,123,622	$	1,078,936	$	1,048,348
Additions		178		42,157		58,972
Dispositions		-		-		(10,974	)
Reclassification		-		2,529		(17,410	)
Balance at end of year	$	1,123,800	$	1,123,622	$	1,078,936

Accumulated depreciation and amortization:
Balance at beginning of year	$	180,043	$	156,819	$	149,459
Additions		24,110		23,224		26,826
Dispositions		-		-		(2,056	)
Reclassification		-		-		(17,410	)
Balance at end of year	$	204,153	$	180,043	$	156,819

Net investments in properties	$	919,647	$	943,579	$	922,117

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a)	Evaluation of Disclosure Controls and Procedures

As required by SEC Rule 13a-15(b) we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, President and Vice President of Finance, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(f) or Rule 15d-15(f) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer, President and Vice President of Finance concluded that as of December 31, 2009 our disclosure controls and procedures were effective such that the information required to be disclosed in our reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms such information is a ccumulated and communicated to our management, including our Chief Executive Officer, President and Vice President of Finance, as appropriate, to allow for timely decisions regarding required disclosure.

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

Management of Mission West Properties, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Management assessed the effectiveness of Mission West Properties, Inc.’s internal control over financial reporting as of December 31, 2009. Management based this assessment on the criteria for effective internal control over financial reporting established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of Mission West Properties, Inc.’s internal control over financial reporting and testi ng of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors. Based on this assessment, management determined that Mission West Properties, Inc. maintained effective internal control over financial reporting as of December 31, 2009.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect the possibility of human error, misstatements and the circumvention or overriding of controls. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Burr Pilger Mayer, Inc., our independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and has issued a report on the effectiveness of our internal control over financial reporting.

(c)	Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the fourth fiscal quarter of 2009 that has materially affected, or is reasonably likely to material affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers and Corporate Governance

The information required by Item 10 is incorporated by reference from the sections titled “Management - Directors and Executive Officers,” “Corporate Governance” and “Code of Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement to be filed with respect to the 2010 annual stockholders’ meeting.

Item 11. Executive Compensation

The information required by Item 11 is incorporated by reference from the section titled “Executive Compensation” in the Company’s definitive proxy statement to be filed with respect to the 2010 annual stockholders’ meeting, excluding.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is incorporated by reference from the sections titled “Share Ownership” and “Securities Authorized for Issuance under Equity Compensation Plans” in the Company’s definitive proxy statement to be filed with respect to the 2010 annual stockholders’ meeting.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is incorporated by reference from the sections titled “Certain Relationships and Related Transactions” and “Corporate Governance” in the Company’s definitive proxy statement to be filed with respect to the 2010 annual stockholders’ meeting.

Item 14. Principal Accountant Fees and Services

The information required by Item 14 is incorporated by reference from the sections titled “Principal Accountant Fees and Services” in the Company’s definitive proxy statement to be filed with respect to the 2010 annual stockholders’ meeting.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)	The following documents are filed as part of this report:

1.	The consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K.

The following financial statement schedules should be read in conjunction with the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

2.	Schedule III - Real Estate and Accumulated Depreciation and Amortization as of December 31, 2009 and 2008, which can be found on pages 75 and 77, respectively.

3.	The exhibits listed on the Exhibit Index either are filed with this Annual Report on Form 10-K or have been filed previously with the SEC and are incorporated by reference to those prior filings.

(b)	The exhibits required by Item 601 of Regulation S-K, including each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form are listed under Item 15(a)(3).

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

MISSION WEST PROPERTIES, INC.

Date: March 16, 2010	By: /s/ Carl E. Berg
	Carl E. Berg
	Chief Executive Officer
	(Principal Executive Officer)


Date: March 16, 2010	By: /s/ Wayne N. Pham
	Wayne N. Pham
	Vice President of Finance and Controller
	(Principal Financial and Accounting Officer)

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Carl E. Berg his true and lawful attorney-in-fact with the power of substitution, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his or her substitute, may do or choose to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Carl E. Berg Carl E. Berg	Chairman of the Board, Chief Executive Officer and Director	March 16, 2010
/s/ William A. Hasler William A. Hasler	Director	March 16, 2010
/s/ Lawrence B. Helzel Lawrence B. Helzel	Director	March 16, 2010
/s/ Raymond V. Marino Raymond V. Marino	President, Chief Operating Officer and Director	March 16, 2010
/s/ Martin S. Roher Martin S. Roher	Director	March 16, 2010

Exhibits required by Item 601 of Regulation S-K.

EXHIBIT INDEX

3.2.1		Articles of Amendment and Restatement of Mission West Properties, Inc. (1)
3.2.2		Amended and Restated Bylaws of Mission West Properties, Inc. as of December 18, 2007 (1a)
4.1		Description of Capital Stock (2)
4.1.1		Specimen Common Stock certificate (2)
10.1.1		Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. (2b)
10.1.2		Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. I (2b)
10.1.3		Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. II (2b)
10.1.4		Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. III (2b)
10.2		Exchange Rights Agreement between Mission West Properties and the Limited Partners(2b)
10.3.1		Not in use
10.3.2		Not in use
10.3.3		Not in use
10.3.4		Not in use
10.4.1		Acquisition Agreement, dated as of May 14, 1998, among Mission West Properties, certain partnerships and the Berg Group (as defined therein) (1)
10.4.2		Amendment of Acquisition Agreement, dated as of July 1, 1998 (1)
10.4.3		Form of Partnership Interest Purchase Demand Note (1)
10.5.1		Stock Purchase Agreement dated as of May 4, 1998, between Mission West Properties and the purchasers of Common Stock in a private placement of 5,800,000 shares and Subscription Agreement relating to same (1)
10.5.2		Stock Purchase Agreement dated as of May 4, 1998 between Mission West Properties and the purchasers of Common Stock in a private placement of 695,058 shares and Subscription Agreement relating to same (1)
10.5.3		Form of Registration Rights Agreement for purchasers, who acquired shares of Common Stock under the May 4, 1998 Stock Purchase Agreements (3)
10.6		Pending Projects Acquisition Agreement among Mission West Properties, the Operating Partnership and the Berg Group (2b)
10.7		Berg Land Holdings Option Agreement between Mission West Properties and certain members of the Berg Group (2b)
10.8		Berg & Berg Enterprises, Inc. Sublease Agreement (1)
10.9		Not in use
10.10		Not in use
10.11		Not in use
10.12		Lease Agreement with Apple Computer, Inc. (4a)
10.13		Not in use
10.14		Lease Agreement with Amdahl Corporation (4b)
10.15		Hartford Fixed Rate Term Loan Agreement (5)
10.15.1		Hartford Life Insurance Company Promissory Note (5)
10.15.2		Hartford Life and Annuity Insurance Company Promissory Note (5)
10.15.3		Hartford Life and Accident Insurance Company Promissory Note (5)
10.15.4		Hartford-Mission West Properties, L.P. (Santa Clara) Deed of Trust, Security Agreement and Fixture Filing (5)
10.15.5		Hartford-Mission West Properties, L.P. (Alameda) Deed of Trust, Security Agreement and Fixture Filing(5)
10.15.6		Hartford-Mission West Properties, L.P. I Deed of Trust, Security Agreement and Fixture Filing (5)
10.15.7		Hartford-Mission West Properties, L.P. II Deed of Trust, Security Agreement and Fixture Filing (5)
10.15.8		Hartford-Mission West Properties, L.P. III Deed of Trust, Security Agreement and Fixture Filing (5)
10.15.9		Hartford Carveout Indemnity Agreement (5)
10.15.10		Hartford Environmental Indemnity Agreement (5)
10.19		Waiver Agreement (6)
10.20		Ownership Limit Exemption Agreement dated December 29, 1998 between Mission West Properties and Dan and Paul McCarthy (7)
10.21		Lease Agreement with Microsoft Corporation, dated July 25, 1998 (8)
10.21.1		Lease Agreement with Microsoft Corporation, dated December 23, 2004 (8a)
10.22		Contribution Agreement (8)

10.23		Not in use
10.24		Not in use
10.25		Not in use
10.26		Supplemental Agreement among Mission West Properties, Inc., Carl E. Berg and Clyde J. Berg (9)
10.27		Berg Group Revolving Credit – $100,000,000 Secured Promissory Note (10) (Terminated)
10.27.1		Third Amendment to Berg Group $100,000,000 Revolving Line of Credit (11) (Terminated)
10.28		Berg Group Deed of Trust Securing Revolving Promissory Note (12)
10.29		Berg Group Promissory Note, dated October 8, 2009 (20)
10.30		Mission West Properties, LP Continuing Guaranty (13)
10.31		Mission West Properties, LP II Continuing Guaranty (13)
10.32		Mission West Properties, L.P. Promissory Note to Northwestern Mutual Life Insurance Company (13)
10.32.1		Mission West Properties, L.P. First Amendment to Promissory Note to Northwestern Mutual Life Insurance Company (18)
10.33		Mission West Properties, L.P. I Promissory Note to Northwestern Mutual Life Insurance Company (13)
10.33.1		Mission West Properties, L.P. I First Amendment to Promissory Note to Northwestern Mutual Life Insurance Company (18)
10.34		Mission West Properties, L.P. II Promissory Note to Northwestern Mutual Life Insurance Company (13)
10.34.1		Mission West Properties, L.P. II First Amendment to Promissory Note to Northwestern Mutual Life Insurance Company (18)
10.35		Mission West Properties, L.P. Deed of Trust and Security Agreement (First Priority) (13)
10.36		Mission West Properties, L.P. Deed of Trust and Security Agreement (Second Priority) (13)
10.36.1		Mission West Properties, L.P. First Amendment to Deed of Trust and Security Agreement (18)
10.37		Mission West Properties, L.P. I Deed of Trust and Security Agreement (First Priority) (13)
10.38		Mission West Properties, L.P. I Deed of Trust and Security Agreement (Second Priority) (13)
10.38.1		Mission West Properties, L.P. I First Amendment to Deed of Trust and Security Agreement (18)
10.39		Mission West Properties, L.P. II Deed of Trust and Security Agreement (First Priority) (13)
10.40		Mission West Properties, L.P. II Deed of Trust and Security Agreement (Second Priority) (13)
10.40.1		Mission West Properties, L.P. II First Amendment to Deed of Trust and Security Agreement (18)
10.41		Mission West Properties, L.P. Absolute Assignment of Leases and Rents (First Priority) (13)
10.42		Mission West Properties, L.P. I Absolute Assignment of Leases and Rents (First Priority) (13)
10.43		Mission West Properties, L.P. II Absolute Assignment of Leases and Rents (First Priority) (13)
10.44		Mission West Properties L.P., L.P. I and L.P. II First Amendment to Contribution and Reimbursement Agreement (18)
10.45		Not in use
10.46*		2004 Equity Incentive Plan (14)
10.47		Allianz Loan Secured Installment Note (15)
10.48		Allianz Loan Deed of Trust, Security Agreement, Fixture Filing with Absolute Assignment of Rents(15)
10.49		Allianz Loan Limited Guaranty (15)
10.50*		Form of Non-statutory Stock Option Agreement with Dividend Rights under 2004 Equity Incentive Plan (15)
10.51		Allianz Loan II Secured Installment Note (16)
10.52		Allianz Loan II Deed of Trust, Security Agreement, Fixture Filing with Absolute Assignment of Rents (16)
10.53		Allianz Loan II Limited Guaranty (16)
10.54		Allianz Loan II Loan Modification Agreement (16)
10.55		Allianz Loan II Loan Modification Agreement and Amendment of Deed of Trust (18)
10.56		Heritage Bank of Commerce Revolving Credit Loan Agreement (19)
10.56.1		Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated April 17, 2008 (19)
10.56.2		Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated June 5, 2009 (19)
10.56.3		Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated August 20, 2009 (20)
10.56.4		Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated October 13, 2009 (20)
10.57		M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 14, 2009 (19)
10.58		M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 21, 2009 (19)
10.59		M&M Real Estate Control & Restructuring, LLC Promissory Note, dated July 1, 2009 (19)

10.60		M&M Real Estate Control & Restructuring, LLC Promissory Note, dated October 2, 2009 (20)
10.61		M&M Real Estate Control & Restructuring, LLC Promissory Note, dated October 23, 2009 (20)
21.1		Subsidiaries of the Registrant (17)
23.1		Consent of Independent Registered Public Accounting Firm
24.1		Powers of Attorney (included on the signature page hereto)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2		Certification of Chief Operating Officer pursuant to Rule 13a-14(a)
31.3		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1		Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Management contract or compensatory plan or arrangement (1) Incorporated herein by reference to the same-numbered exhibit to the Company’s Registration Statement on Form S-4/A filed on July 20, 1998 and declared effective on November 23, 1998 (Commission File No. 333-52835-99). (1a) Incorporated herein by reference to Exhibit 3.2 to the current report on Form 8-K filed on December 20, 2007 (Commission File No. 000-25235). (2) Incorporated herein by reference to the registration statement on Form 8-A/A filed on March 21, 2008 (Commission File No. 001-34000). (2a) Incorporated herein by reference to the same numbered exhibit to the registration statement on Form 8-A/A filed on March 21, 2008 (Commission File No. 001-34000). (2b) Incorporated herein by reference to the same-numbered exhibit to the Company’s Post-effective Amendment No. 1 to Registration Statement on Form S-4 filed on Form S-3 on February 11, 1999 (Commission File No. 333-52835-99). (3) Incorporated herein by reference to Exhibit 10.8 to the Company’s Post-effective Amendment No. 1 to Registration Statement on Form S-4 filed on Form S-3 on February 11, 1999 (Commission File No. 333-52835-99). (4a) Incorporated herein by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-4/A filed on June 17, 1998 and declared effective on November 23, 1998 (Commission File No. 333-52835). (4b) Incorporated herein by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-4/A filed on June 17, 1998 and declared effective on November 23, 1998 (Commission File No. 333-52835). (5) Incorporated herein by reference to the same-numbered exhibit to current report on Form 8-K filed on October 7, 2008 (Commission File No. 001-34000). (6) Incorporated herein by reference to the same-numbered exhibit to the Registration Statement on Form S-4/A filed on November 16, 1998 and declared effective on November 23, 1998 (Commission File No. 333-52835-99). (7) Incorporated herein by reference to the same numbered exhibit to the annual report on Form 10-K for 1998 filed on March 31, 1999 (Commission File No. 000-25235). (8) Incorporated herein by reference to the same-numbered exhibit to current report on Form 8-K filed on May 14, 1999 (Commission File No. 000-25235). (8a) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on May 10, 2005 (Commission File No. 000-25235). (9) Incorporated herein by reference to the same-numbered exhibit to the Registration Statement on Form S-11/A filed on June 15, 1999 (Commission File No. 333-80203). (10) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on November 13, 2001 (Commission File No. 000-25235). (11) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on August 12, 2003 (Commission File No. 000-25235). (12) Incorporated herein by reference to the same numbered exhibit to the annual report on Form 10-K for 1999 filed on March 30, 2000 (Commission File No. 000-25235). (13) Incorporated herein by reference to the same-numbered exhibit to the annual report on Form 10-K for 2002 filed on March 27, 2003 (Commission File No. 000-25235). (14) Incorporated herein by reference to Appendix II to the Company’s Schedule 14A Proxy Statement filed with the Securities and Exchange Commission on October 22, 2004 (Commission File No. 000-25235). (15) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on May 10, 2005 (Commission File No. 000-25235). (16) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on August 9, 2005 (Commission File No. 000-25235). (17) Incorporated herein by reference to the same-numbered exhibit to the annual report on Form 10-K for 1998 filed on March 31, 1999 (Commission File No. 000-25235). (18) Incorporated herein by reference to the same-numbered exhibit to the annual report on Form 10-K for 2008 filed on March 16, 2009 (Commission File No. 000-25235). (19) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on August 7, 2009 (Commission File No. 000-25235). (20) Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on November 9, 2009 (Commission File No. 000-25235).

EX-10.15 2 exh10_15t.htm FIXED RATE TERM LOAN AGREEMENT exh10_15t.htm

Exhibit 10.15

FIXED RATE TERM LOAN AGREEMENT

between

MISSION WEST PROPERTIES, L.P.,

MISSION WEST PROPERTIES, L.P. I, MISSION WEST PROPERTIES, L.P. II and MISSION WEST PROPERTIES, L.P. III

each, an “Individual Borrower” and collectively, as “Borrower”

and

HARTFORD LIFE INSURANCE COMPANY,

HARTFORD LIFE AND ACCIDENT INSURANCE COMPANY and

HARTFORD LIFE AND ANNUITY INSURANCE COMPANY

collectively, as “Lender”

October 1, 2008

Hartford Loan No. BHM04X7M6

TABLE OF CONTENTS

; Page

ARTICLE 1.

CERTAIN DEFINITIONS

Section 1.1.

Certain Definitions

Section 1.2.

General Construction

Section 1.3.

Lender’s Discretion

Section 1.4.

Knowledge of Borrower Parties

ARTICLE 2.

LOAN TERMS

Section 2.1.

The Loan

Section 2.2.

Interest Rate; Late Charge

Section 2.3.

Terms of Payment; Maturity Date

Section 2.4.

Prepayment

ARTICLE 3.

INSURANCE, CONDEMNATION, AND IMPOUNDS

Section 3.1.

Insurance

Section 3.2.

Use and Application of Insurance Proceeds

Section 3.3.

Condemnation Awards

Section 3.4.

Impounds

ARTICLE 4.

LEASING MATTERS

Section 4.1.

Representations and Warranties

Section 4.2.

Lender’s Lease Approval Rights

Section 4.3.

Covenants

Section 4.4.

Tenant Estoppels

Section 4.5.

Conflict with Assignment of Leases and Rents

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES

Section 5.1.

Organization and Power

Section 5.2.

Validity of Loan Documents

Section 5.3.

Liabilities; Litigation

Section 5.4.

Taxes and Assessments

Section 5.5.

Other Agreements; Defaults

Section 5.6.

Compliance with Legal Requirements

Section 5.7.

Location of Borrower

Section 5.8.

ERISA

TABLE OF CONTENTS

(continued)

& #160; Page

Section 5.9.

Margin Stock

Section 5.10.

Tax Filings

Section 5.11.

Solvency

Section 5.12.

Full and Accurate Disclosure

Section 5.13.

Property Conditions

Section 5.14.

Terrorism and Anti-Money Laundering

Section 5.15.

Financing Transaction

Section 5.16.

Personal Property

Section 5.17.

Additional Real Property

Section 5.18.

Material Agreements

ARTICLE 6.

FINANCIAL REPORTING; AUDITS

Section 6.1.

Financial Statements

Section 6.2.

Accounting Principles

ARTICLE 7.

COVENANTS

Section 7.1.

Due on Sale and Encumbrance; Transfers of Interests

Section 7.2.

Taxes; Charges

Section 7.3.

Alterations and Renovations

Section 7.4.

Operation; Maintenance

Section 7.5.

Taxes on Security

Section 7.6.

Compliance with Loan Documents; Further Assurances33

Section 7.7.

Estoppel Certificates

Section 7.8.

Notice of Certain Events

Section 7.9.

Indemnification

Section 7.10.

Property Management

Section 7.11.

Material Agreements

Section 7.12.

Intentionally Omitted

Section 7.13.

ERISA

Section 7.14.

Appraisal

Section 7.15.

Release of Collateral

Section 7.16.

Substitution of Collateral

TABLE OF CONTENTS

(continued)

& #160; Page

Section 7.17.

Excess Collateral

ARTICLE 8.

EVENTS OF DEFAULT

Section 8.1.

Defaults

Section 8.2.

Remedies

Section 8.3.

Lender’s Right to Perform the Obligations

ARTICLE 9.

MISCELLANEOUS

Section 9.1.

Notices

Section 9.2.

Amendments and Waivers

Section 9.3.

Limitation on Interest

Section 9.4.

Invalid Provisions

Section 9.5.

Payment and Reimbursement of Expenses

Section 9.6.

Approvals; Third Parties; Conditions

Section 9.7.

Lender Not in Control; No Partnership

Section 9.8.

Time of the Essence

Section 9.9.

Successors and Assigns

Section 9.10.

Servicing, Transfers, Assignments and Participations

Section 9.11.

Replacement Documents

Section 9.12.

Renewal, Extension or Rearrangement

Section 9.13.

Waivers

Section 9.14.

Cumulative Rights

Section 9.15.

Exhibits and Schedules

Section 9.16.

Titles of Articles, Sections and Subsections

Section 9.17.

Promotional Material

Section 9.18.

Survival

Section 9.19.

Governing Law

Section 9.20.

Entire Agreement

Section 9.21.

Counterparts

Section 9.22.

Obligations of Borrower, Joint and Several

Section 9.23.

WAIVER OF PUNITIVE OR CONSEQUENTIAL DAMAGES

iii

TABLE OF CONTENTS

(contunued)

& #160; Page

Section 9.24.

WAIVER OF JURY TRIAL

ARTICLE 10.

LIMITATIONS ON LIABILITY

Section 10.1.

Limitation on Liability

LIST OF EXHIBITS AND SCHEDULES

Exhibit A-1 through A-12 - Legal Description of each Property

Exhibit B - Closing Statement

Schedule 1 - Allocated Loan Amounts

Schedule 2 - Excess Collateral

Schedule 4.1 - Rent Roll

Schedule 5.16 - Personal Property

Schedule 5.18 - List of Material Agreements

Hartford Loan No. BHM04X7M6

FIXED RATE TERM LOAN AGREEMENT

This FIXED RATE TERM LOAN AGREEMENT (this “Agreement”) is entered into as of October 1, 2008 by and among MISSION WEST PROPERTIES, L.P., MISSION WEST PROPERTIES, L.P. I, MISSION WEST PROPERTIES, L.P. II and MISSION WEST PROPERTIES, L.P. III, each a Delaware limited partnership (each an “Individual Borrower” and collectively, “Borrower”), and HARTFORD LIFE INSURANCE COMPANY, HARTFORD LIFE AND ACCIDENT INSURANCE COMPANY and HARTFORD LIFE AND ANNUITY INSURANCE COMPANY, each a Connecticut corporation (together with their respective successors and assigns, collectively, “Lender”).

RECITALS:

WHEREAS, Borrower desires to obtain the Loan (as defined herein) from Lender; and

WHEREAS, Lender is willing to make the Loan to Borrower, subject to and in accordance with the conditions and terms of this Agreement and the other Loan Documents,

NOW, THEREFORE, in consideration of the covenants set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree, represent and warrant as follows:

ARTICLE 1.

CERTAIN DEFINITIONS

Section 1.1. Certain Definitions. As used herein, the following terms have the meanings indicated:

“Affiliate” means, as to any Person, any other Person that directly or indirectly (through one or more intermediaries) controls, is controlled by or is under common control with the specified Person. For purposes of this definition, “Control” shall be deemed to exist if a Person possesses, directly or indirectly, the power to direct or cause the direction of the management and decision making policies of such other Person, whether through ownership of voting securities, by contract, or otherwise.

“Allocated Loan Amount” means, for any Property, the Allocated Loan Amount set forth on Schedule 1.

“Anti-Money Laundering Laws” means the USA Patriot Act of 2001, the Bank Secrecy Act, as amended through the date hereof, Executive Order 13324 – Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism, together with all annexes thereto, as amended from time to time, and other federal laws and regulations and executive orders administered by the United States Department of the Treasury, Office of Foreign Assets Control (“OFAC”) which prohibit, among other things, the engagement in transactions with, and the provision of services to, certain foreign countries, territories, entities and individuals (such individua ls include specially designated nationals, specially designated narcotics traffickers and other parties subject to OFAC sanction and embargo programs), and such additional laws and programs administered by OFAC which prohibit dealing with individuals or entities in certain countries regardless of whether such individuals or entities appear on any of the OFAC lists.

“Applicable Prepayment Fee” means a prepayment fee payable by Borrower to Lender in an amount equal to:

(a) For any prepayment tendered (or deemed tendered) during the Lockout Period, other than a prepayment tendered in connection with a Partial Release pursuant to Section 7.15, the Lockout Prepayment Fee;

(b) For any prepayment tendered (or deemed tendered) for the period from and including October 1, 2009 through the end of the Lockout Period in connection with a Partial Release pursuant to Section 7.15, a prepayment fee equal to Lockout Yield Maintenance;

(c) For any prepayment tendered (or deemed tendered) during the period from and including the first Business Day following the expiration of the Lockout Period through and including June 30, 2018, a prepayment fee equal to Standard Yield Maintenance;

(d) For any prepayment tendered (or deemed tendered) during the period from and including July 1, 2018 through and including the Scheduled Maturity Date, no prepayment fee (including Lockout Yield Maintenance or Standard Yield Maintenance) shall be payable in connection with a prepayment.

“Application” means the Mortgage Loan Application dated September 7, 2008, submitted by Carveout Indemnitor to Lender, as the same was modified (if at all) by the Commitment (as defined in the Application).

“Assignment of Leases and Rents” means, collectively, each Assignment of Leases and Rents, now or hereafter executed by any Borrower Party for the benefit of Lender, which, collectively, convey to Lender an interest in the Leases and the Rents, as more fully described therein.

“Assignment of Management Agreement” means, collectively, each Assignment of Management Agreement and Subordination of Management Fees, now or hereafter executed by any Borrower Party, and consented to by each Property Manager thereto, for the benefit of Lender, which, collectively, convey to Lender an interest in each Management Agreement as more fully described therein.

“Assignment of Property Documents” means, collectively, each Assignment of Property Documents, now or hereafter executed by any Borrower Party for the benefit of Lender, which, collectively, convey to Lender an interest in all contracts, licenses, permits, agreements and warranties associated with the ownership and operation of each Property, as more fully described therein.

“Assumption Fee” has the meaning ascribed to such term in Section 7.1(c).

“Assumption Request” has the meaning ascribed to such term in Section 7.1(c).

“Assumption Work Fee” has the meaning ascribed to such term in Section 7.1(c).

“Authorized Representative” means, for any Person, an authorized executive officer (which, for purposes of this Agreement, means a president, vice president, secretary, treasurer, chief executive officer or chief operating officer), member, manager or partner of such Person acting in a representative (and not such Person’s individual) capacity, who is duly authorized by all necessary action to bind Borrower contractually and whose responsibilities with such Person require that he/she has knowledge relating to the subject matter of the applicable certification or affidavit.

“Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy”, as amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder.

“Borrower” shall have the meaning ascribed to such term in the preamble hereof.

“Borrower Party” or “Borrower Parties” means, individually and/or collectively, Borrower, Carveout Indemnitor, any General Partner and their respective Affiliates (including any Property Manager that is an Affiliate); provided, however, that any Person who is an officer, director, shareholder, or employee of Carveout Indemnitor or any General Partner shall be included as a Borrower Party only to the extent that such Person is acting solely in such capacity as an officer, director, shareholder, or employee.

“Business Day” means any day, other than a Saturday, Sunday, legal holiday or any other day on which national banks in Hartford, Connecticut are authorized or required by law to close for general banking business.

“Carveout Indemnitor” means Mission West Properties, Inc., a Maryland corporation.

“Carveout Indemnity” means the Carveout Indemnity Agreement, dated as of the Funding Date, and executed by Carveout Indemnitor to and for the benefit of Lender.

“Casualty Consultant” has the meaning ascribed to such term in Section 3.2(e).

“Closing Affidavit” means the Closing Affidavit dated as of the Funding Date executed by Borrower and Carveout Indemnitor to and for the benefit of Lender, setting forth certain representations and warranties of Borrower and Carveout Indemnitor as of the Funding Date.

“Closing Statement” means the closing statement attached as Exhibit B showing total costs relating to the subject transaction and use of the Loan proceeds.

“Collateral” has the collective meaning ascribed to such term in the Mortgage.

“Collateral Substitution” has the meaning ascribed to such term in Section 7.16.

“Collateral Substitution Fee” has the meaning ascribed to such term in Section 7.16.

“Contract Rate” means, as the context so requires, the non-default per annum rate of interest accruing on the outstanding principal balance of the Loan as set forth in Section 2.2(a).

“Converted Treasury Yield” means the yield available, or if there is more than one yield available, the average yields of United States Treasury non-callable bonds and notes having a maturity date closest to (before, on, or after) the Scheduled Maturity Date, as reported in the Wall Street Journal or similar publication on the fifth (5th) Business Day preceding the date prepayment will be made, converted to a monthly equivalent yield (the monthly “equivalent yield” being the rate which, when compounded monthly, is equivalent to the selected Treasury rate when compounded semi-annually). The Converted Treasury Yield shall be calculated by Len der and, absent manifest error, shall be deemed conclusive.

“Debt” means, for any Person, without duplication: (i) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit, or for the deferred purchase price of property for which such Person or its assets is liable, (ii) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable, if such amounts were advanced under the credit facility, (iii) all amounts required to be paid by such Person as a guaranteed payment, including guaranteed payments to partners, members or other equity owners, or a preferred or special dividend, including any mandatory redemption of shares or interests, (iv) all indebtedness guaranteed by such Person, directly or indirectly, (v) all obligations under leases that constitute capital leases for which such Person is liable, and (vi) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss.

“Debt Service” means the monthly payments of interest, principal and any other scheduled payments due in connection with the Loan for the period of time in question, but excluding escrows or reserves required pursuant to the terms of the

“Debt Service Coverage Ratio” means a quotient, expressed as a percentage, of (i) projected Net Operating Income for the period in question, divided by (ii) projected Debt Service to become due and payable for such period. The Net Operating Income and Debt Service shall be determined by Lender in the exercise of its reasonable judgment.

“Default Rate” means the lesser of (i) the maximum rate of interest allowed by applicable law for commercial loans of this type, and (ii) four percent (4%) per annum in excess of the Contract Rate.

“Demand Period” means a period of fifteen (15) days, commencing on the date a written demand is issued by Lender and expiring at Lender’s close of business on the fifteenth (15th) day following the date of said demand.

“Environmental Indemnity Agreement” means the Environmental Indemnity Agreement dated as of the Funding Date, executed by Borrower and Carveout Indemnitor for the benefit of Lender, and pertaining to environmental matters affecting the Portfolio.

“Equipment” means all “equipment” as defined in the UCC, in which Borrower has any right, title or interest, whether now owned or hereafter acquired, including all of the following (regardless of how classified under the UCC): all building materials, construction materials, personal property constituting furniture, fittings, signage, computer equipment, leasehold improvements, machinery, devices, interior improvements, appurtenances, equipment, plant, fixtures, computers, electronic data processing equipment, telecommunications equipment and other fixed assets now owned or hereafter acquired by Borrower, all Proceeds (as defined in the UCC) thereof and all additions to, substitutions for, replacements of or accessions to any of the foregoing items and all attachments, components, parts (including spare parts) and accessories, whether installed thereon or affixed thereto, all regardless of whether the same are located at a Property or are located elsewhere (including in warehouses or other storage facilities or in the possession of or on the premises of a bailee, vendor or manufacturer) for purposes of manufacture, storage, fabrication or transportation.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“Escrow Agent” means First American Title Insurance Company, responsible for the consummation of the transaction contemplated by this Agreement pursuant to the Escrow Instructions.

“Escrow Instructions” mean Lender’s written escrow instruction to Escrow Agent relating to the consummation of the transaction contemplated by this Agreement.

“Event of Default” has the meaning ascribed to such term in Article 8.

“Excess Collateral” has the meaning ascribed to such term in Section 7.17.

“Excess Collateral Release” has the meaning ascribed to such term in Section 7.17.

“Funding Date” shall be considered the date that the proceeds of the Loan are wired or delivered to the Escrow Agent, regardless of the date that the Escrow Agent releases such funds to Borrower.

“GAAP” means generally accepted accounting principles in the United States of America in effect as of the date of determination, in all cases, consistently applied from year to year.

“General Partner” means, individually and/or collectively, Carveout Indemnitor and any other Person who may at any time in the future, with Lender’s approval (such approval not to be unreasonably withheld), become a general partner of any Individual Borrower.

“Governmental Authority” means any court, board, agency, commission, office or other authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence, claiming jurisdiction over the Collateral or any part thereof, or any rights or remedies available to Lender under the Loan Documents, at law or in equity.

“Guaranty” means the Carveout Indemnity.

“Impounds” has the meaning ascribed to such term in Section 3.4(a).

“Improvements” has the collective meaning ascribed to such term in the Mortgage.

“Individual Borrower” has the meaning ascribed to such term in the preamble hereof.

“Insurance” has the meaning ascribed to such term in Section 3.1(a).

“Insurance Premiums” has the meaning ascribed to such term in Section 3.1(b).

“Lease” or “Leases” have the collective meanings ascribed to such terms in the Mortgage.

“Legal Requirements” means all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting the Collateral or any part thereof, or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in force, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to any Borrower, at any time in force affecting the Collateral or any part thereof, including any which may (i) require repairs, modifications or alterations in or to an y Property or any part thereof or (ii) in any way limit the use and enjoyment of the Collateral.

“Lien” means any interest in or to, or claim against, the Collateral, securing an obligation owed to, or evidencing a claim by, any Person other than the owner of the subject Property, whether such interest or claim is based on common law, statute or contract, including the lien or security interest arising from a deed of trust, mortgage, assignment, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term “Lien” shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting the subject Property.

“Loan” means the loan in the aggregate principal amount of One Hundred Fifteen Million Dollars ($115,000,000.00) to be funded by Lender to Borrower under and subject to this Agreement, to be evidenced by the Note and to be secured by the Loan Documents.

“Loan Documents” means, collectively: (i) this Agreement, (ii) the Note, (iii) the Mortgage, (iv) the Assignment of Leases and Rents, (v) the Assignment of Property Documents, (vi) the Carveout Indemnity, (vii) the Environmental Indemnity Agreement, (viii) the Closing Affidavit, (ix) Uniform Commercial Code financing statements, (x) such assignments of management agreements, contracts and other rights as may be requested by Lender, (xi) all other documents now or hereafter executed by Borrower, Carveout Indemnitor or any other Person to evidence or secure the payment or the performance of the Obligations or otherwise executed in connection with the documents described in the foregoing items (i) through (x), including the Assignment of Manag ement Agreement and including all documents hereafter executed in connection with any Collateral Substitution, (xii) the Application (provided that any inconsistency between the terms of the Application and the terms of the Loan Documents shall be controlled by the terms of the Loan Documents), and (xiii) all amendments, modifications, renewals, restatements, extensions, substitutions and replacements of any of the foregoing items.

“Lockout Period” means the period commencing on the Funding Date and ending on September 30, 2010.

“Lockout Prepayment Fee” has the meaning ascribed to such term in Section 2.4(f).

“Lockout Yield Maintenance” means a yield maintenance prepayment premium equal to the greater of: (A) one percent (1%) of the outstanding principal balance of the Note being prepaid; and (B) an amount determined by:

Scheduled Maturity Date (prior to the application of the principal being prepaid), utilizing a discount rate equal to the Converted Treasury Yield, divided by the frequency of the interest payments made during a calendar year; and

(ii) Subtracting from such sum the outstanding principal balance (prior to application of the principal being prepaid) as of the date prepayment will be made; and

(iii) Multiplying such remainder by the quotient of (A) the principal being prepaid, divided by (B) the outstanding principal balance as of the date of prepayment (prior to application of the principal being prepaid.

“Major Damage Event” means any fire or other casualty to any Property or the other Collateral, or any condemnation proceeding relating to any Property: (i) for which the total cost to repair or restore, as determined in the reasonable estimation of Lender after reasonable prior consultation with Borrower, will exceed five percent (5.00%) of the Allocated Loan Amount associated with the affected Property, and (ii) that occurs while an Event of Default exists.

“Major Lease” means any Lease (i) covering 250,000 square feet or more of space within any Property (including any series of Leases to the Tenant or an Affiliate of such Tenant covering in the aggregate 250,000 square feet or more of space within the Portfolio), (ii) which includes a material modification (meaning any material increase in the economic obligations of the “lessor” or “landlord” under the Lease, any material diminution of the economic obligations of the “lessee” or “te nant” under the Lease, or any material diminution in the rights or protections afforded the “lessor” or “landlord” under the Lease) to the standard form lease approved by Lender (such approval not to be unreasonably withheld), (iii) with an initial term of less than three (3) years or more than ten (10) years, (iv) that either (y) grants the “lessee” or “tenant” under the Lease any purchase option or right of first refusal to purchase all or any portion of any Property, or (z) grants the “lessee” or “tenant” under the Lease any interest in the ownership of any Property or provides any ince ntives equivalent to an ownership interest in any Property, (v) that is not part of an arms length transaction, or is to Borrower, Carveout Indemnitor, an Affiliate of Borrower or Carveout Indemnitor, or a creditor of Borrower or Carveout Indemnitor, or (vi) pursuant to which the “lessee” or “tenant” under the Lease is not obligated to take possession within 30 days following completion of the required improvements.

“Management Agreement” means any property management agreement hereafter entered into between any Borrower Party and a Property Manager related to any Property and any and all amendments, modifications, renewals, extensions, replacements or supplements thereto permitted in accordance with the terms of the Loan Documents.

“Material Agreement” means any contract or agreement entered into by any Borrower Party or any Property Manager which cannot be terminated within thirty (30) days without cause or payment of a termination fee and would be binding on Lender or any Property upon Lender foreclosing its Lien on the affected Property (or otherwise accepting a deed-in-lieu of foreclosure).

“Maturity Date” means the earlier to occur of (i) the Scheduled Maturity Date and (ii) any earlier date on which the Loan is required to be paid in full, by acceleration or otherwise, under this Agreement or any of the other Loan Documents.

“Mortgage” means, collectively, each deed of trust, mortgage or other property security instrument now or hereafter executed by any Borrower Party in favor of Lender, securing such Borrower Party’s obligations under the Loan Documents and encumbering, among other things, any Property.

“Net Operating Income” means, for any period, the amount by which Operating Revenues exceed Operating Expenses for such period.

“Net Proceeds” has the meaning ascribed to such term in Section 3.2(b).

“Net Proceeds Deficiency” has the meaning ascribed to such term in Section 3.2(g).

“Note” means, collectively, each promissory note evidencing the repayment of the Loan, now or hereafter executed or assumed by Borrower and payable to the order of Lender, including: (i) the Promissory Note dated as of the Funding Date, in the stated principal amount of $90,000,000.00, executed by Borrower and payable to the order of Hartford Life Insurance Company, a Connecticut corporation, (ii) the Promissory Note dated as of the Funding Date, in the stated principal amount of $15,000,000.00, executed by Borrower and payable to the order of Hartford Life and Annuity Insurance Company, a Connecticut corporation, and (iii) the Promissory Note dated as of the Funding Date, in the stated principal amount of $10,000,000.00, executed by Borrow er and payable to the order of Hartford Life and Accident Insurance Company, a Connecticut corporation.

“Obligations” means, collectively: (i) the Loan, (ii) all other principal and all interest, fees, expenses, charges, reimbursements, and other amounts due under or secured by the Loan Documents, (iii) all principal, interest and other amounts which may hereafter be loaned by Lender, its successors or assigns, to or for the benefit of Borrower or Carveout Indemnitor, when evidenced by a promissory note or other instrument which, by its terms, is governed or secured by any of the Loan Documents, and (iv) all other indebtedness, obligations, covenants, and liabilities now or hereafter existing of any kind of Borrower or Carveout Indemnitor to Lender under any of the Loan Documents.

“OFAC Prohibited Person” means a country, territory or Person (i) listed on, included within or associated with any of the countries, territories or Persons referred to on The Office of Foreign Assets Control’s List of Specially Designated Nationals and Blocked Persons or any other prohibited person lists maintained by any Governmental Authority, or otherwise included within or associated with any of the countries, territories or Persons referred to in or prohibited by OFAC or any other Anti-Money Laundering Laws, or (ii) which pays, donates, transfers or otherwise assigns any property, money, goods, services, or other benefits from any Property directly or indirectly, t o any countries, territories or Persons on or associated with any country, territory or Person on such list or included in such laws.

“Operating Expenses” means, without duplication, all reasonable and necessary expenses of operating any Property or Properties in question in the ordinary course of business which are computed in accordance with GAAP (on an accrual basis) and which are directly associated with and fairly allocable to such Property or Properties in question for the applicable period, including Taxes, insurance premiums, maintenance and utility costs, a reserve for replacements and/or repairs, management fees and costs payable under any Management Agreement (which fees and costs under any Management Agreement shall not exceed prevailing market rates), recurring accounting, legal, and other professional fees, fees relating to environmental audits and income an d expense audits and other expenses incurred by Lender and reimbursed by Borrower under this Agreement and the other Loan Documents, wages, salaries, and personnel expenses properly allocated to such Property or Properties in question, and any other category of recurring property expense that is customary for a property of the type and size as such Property or Properties in question and is reasonably approved by Lender; but excluding Debt Service, capital expenditures, any of the foregoing expenses which are paid from deposits to cash reserves previously included as Operating Expenses, any payment or expense for which any Borrower Party was or is to be paid or reimbursed from proceeds of the Loan or for which any Borrower Party was or is to be reimbursed from proceeds under insurance or by any third party, any non-cash charges such as depreciation and amortization, and federal, state or local income taxes, or legal and other professional fees u nrelated to the operation of such Property or Properties in question, in each case subject to reasonable adjustment by Lender in accordance with its then current audit policies and procedures.

“Operating Revenues” means, without duplication, all cash receipts and other income of any Borrower Party attributable to the ownership and operation of any Property or Properties in question, or otherwise arising in respect of such Property or Properties in question after the Funding Date, computed in accordance with GAAP (on an accrual basis, but without treating any Rents on a straight-line basis), and which are properly allocable to such Property or Properties in question for the applicable period, including receipts from Leases and parking agreements, license and concession fees and charges and other miscellaneous operating revenues, proceeds from rental or business interruption insurance, and withdrawals from cash reserves (except to the extent any expense paid therewith are excluded from Operating Expenses); but excluding any interest income from any source, security deposits and earnest money deposits until they are forfeited by the depositor, income from Tenants in bankruptcy, advance rentals until they are earned, capital contributions to any Borrower Party and proceeds from a sale, casualty, condemnation or other disposition of any portion of such Property or Properties in question, and other proceeds from

non-recurring or extraordinary events, in each case subject to reasonable adjustment by Lender in accordance with its then current audit policies and procedures.

“Partial Release” has the meaning ascribed to such term in Section 7.15.

“Partial Release Prepayment” has the meaning ascribed to such term in Section 7.15.

“Payment Date” means the first (1st) calendar day of each calendar month, commencing on November 1, 2008, and continuing on the first (1st) calendar day of each calendar month thereafter; provided that if the first (1st) calendar day of any month is not a Business Day, then the “Payment Date” shall be the first Business Day immediately following the first (1st) calendar day of such month; provided further that a change in the Payment Date in accordance with the immediately preceding proviso shall not change the period for which interest is calculated in accordance with Section 2.2(b).

“Permitted Encumbrances” has the collective meaning ascribed to such term in the Mortgage.

“Permitted Transfer” means:

(a) (i) Transfers of shares or other securities of Carveout Indemnitor by the holders thereof on any national securities exchange or other stock market on which the shares or other securities of Carveout Indemnitor are listed or in private transactions; provided that transfers made in connection with the sale or merger of Carveout Indemnitor shall not be permitted by this subclause (i) and shall be governed by subclause (iii) below;

(ii) Issuances of shares or other securities in Carveout Indemnitor (including the issuance of such shares in connection with the conversion of operating partnership units in any Individual Borrower or the issuance of such shares in connection with the exercise of any stock options); provided that issuances made in connection with the sale or merger of Carveout Indemnitor shall not be permitted by this subclause (ii) and shall be governed by subclause (iii) below; or

(iii) Transfers or issuances of shares or other securities in Carveout Indemnitor in connection with the sale or merger of Carveout Indemnitor, or any other transaction with Carveout Indemnitor subject to Rule 145(a) of the United States Securities and Exchange Commission (“Rule 145(a)”); provided that (A) immediately following any such Transfer or issuance under this subclause (iii), Carveout Indemnitor or its successor (1) has a Tangible Net Worth of at least $100,000,000; and (2) is an owner or manager of properties used for research and development, office or industrial purposes whose executive officers have at least ten (10) years experience in the ownership and/or management of properties used for research and development, office or industrial purposes in major metropolitan areas in the United States; and (B) if in connection with any such sale or merger or other Rule 145(a) transaction, Carveout Indemnitor is no longer a separate legal entity complying with the requirements of subclause (i) above, then the successor to Carveout Indemnitor, prior to the effective date of any such sale, merger or other Rule 145(a) transaction, must execute and deliver to Lender a Carveout Indemnity and Environmental Indemnity Agreement substantially in the form of the Carveout Indemnity and Environmental Indemnity Agreement executed by Carveout Indemnitor as of the Funding Date, together with reasonable evidence of such entity’s power and authority to execute, deliver and perform under such agreements (including an opinion of counsel in form reasonably required by Lender); or

(b) Issuances of limited partnership interests in any Individual Borrower, including issuances of operating partnership units in any Individual Borrower, and Transfers by a limited partner of limited partnership interests in any Individual Borrower.

“Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, limited liability partnership, unincorporated organization, real estate investment trust, or any other form of entity.

“Personal Property” has the collective meaning ascribed to such term in the Mortgage.

“Policy” or “Policies” has the meaning ascribed to such term in Section 3.1(b).

“Portfolio” means, collectively, all of the Properties.

“Potential Default” means the occurrence of any event or condition that, with the giving of notice, the passage of time, or both, would constitute an Event of Default.

“Prepayment Notice” means the written notice to be given by Borrower to Lender at least thirty (30) days but not more than sixty (60) days prior to any prepayment of the Loan permitted under Section 2.4.

“Property” or “Properties” means, as of any date, each of the parcels of land owned by a Borrower Party, encumbered by a Mortgage as of such date, together with all Improvements located on such parcels. As of the Funding Date, each Property within the Portfolio is described within Exhibit A-1 through Exhibit A-12.

“Property Manager” means any property manager hereafter engaged by any Borrower Party pursuant to the terms and conditions of Section 7.10, and any replacement or successor permitted under the terms of the Loan Documents.

“Qualified Insurer” has the meaning ascribed to such term in Section 3.1(b).

“Rent Roll” has the meaning ascribed to such term in Section 4.1.

“Rents” has the collective meaning ascribed to such term in the Mortgage.

“Restoration” has the meaning ascribed to such term in Section 3.2(a).

“Restoration Documents” has the meaning ascribed to such term in Section 3.2(e).

“Restoration Retainage” has the meaning ascribed to such term in Section 3.2(f).

“San Ignacio Properties” means those Properties located at 6311-51 San Ignacio Avenue, San Jose, California and more particularly described on Exhibit A-12.

“Scheduled Maturity Date” means October 1, 2018.

“Servicer” has the meaning ascribed to such term in Section 9.10.

“Standard Yield Maintenance” means a yield maintenance prepayment premium equal to the greater of: (A) in connection with a deemed or permitted partial prepayment, one percent (1%) of the outstanding principal balance of the Note being prepaid, and in connection with a deemed or permitted prepayment in full, one percent (1%) of the outstanding principal balance of the Note (prior to application of the principal being prepaid); and (B) an amount determined by:

(i) Calculating the sum of the present values of all unpaid principal and interest payments required under the Loan Documents from and including the date a prepayment is tendered through and including the Scheduled Maturity Date, including the present value of the outstanding principal balance of the Note as of such Scheduled Maturity Date (prior to the application of the principal being prepaid), utilizing a discount rate equal to the sum of (A) the Converted Treasury Yield plus (B) fifty (50) basis points, divided by the frequency of the interest payments made during a calendar year; and

(ii) Subtracting from such sum the outstanding principal balance (prior to application of the principal being prepaid) as of the date prepayment will be made; and

“State” means the State of California.

“Tangible Net Worth” means tangible assets minus tangible liabilities as determined in accordance with GAAP.

“Taxes” means all real estate taxes and assessments, franchise taxes and charges, personal property taxes, and other governmental charges relating to any Property (whether or not any such charge or imposition may become Lien upon the applicable Property) that become due and payable during the term of the Loan.

“Tenants” has the collective meaning ascribed to such term in the Mortgage.

“Title Policy” means, collectively, the ALTA (or equivalent) mortgagee title insurance policies issued by First American Title Insurance Company (the “Title Company”) which are, in the aggregate, for the full amount of the Loan, and each of which (i) has an effective date as of the Funding Date (unless any such policy is issued subsequent to the Funding Date as provided in Section 7.16, in which case such policy shall have an effective date as of the closing of such Collateral Substitution), (ii) contains no exceptions (printed or otherwise) other than those approved by Lender (in the exercise of its judgment), (iii) includes all reasonable and customary endorsements requir ed by Lender, and (iv) otherwise complies with Lender’s title requirements and is otherwise in substance and form acceptable to Lender (in the exercise of its reasonable judgment).

“Transfer” means any direct or indirect, voluntary or involuntary sale, transfer, conveyance, mortgage, pledge, assignment, encumbrance, alienation, grant or other comparable action relating to the legal and/or beneficial ownership of, title to or interests in any Property, or any Borrower Party; provided, however, that “Transfer” shall not include (i) the leasing of space within any Property, (ii) direct or indirect transfers of interests in any Borrower Party in compliance with the requirements of Section 7.1(b), or (iii) transfers of the Portfolio in compliance with the requirements of Section 7.1( c) or any Property in compliance with the requirements of Section 7.15, Section 7.16 or Section 7.17, all of which are deemed to be Permitted Transfers.

“UCC” means the Uniform Commercial Code as in effect from time to time in each state where any Property is located; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection or priority of the security interest in any item or portion of the Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than each state where any Property is located, “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection o r non-perfection or priority. Wherever this Agreement refers to terms as defined in the UCC, if such term is defined in more than one Article of the UCC, the definition in Article 9 of the UCC shall control.

Section 1.2. General Construction. Unless otherwise noted or the context shall indicate otherwise: (i) all “Article” and “Section” references shall be to Articles or Sections of this Agreement, (ii) all uses of the word “including” shall mean “including, without limitation”, (iii) the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, (iv) all references to “day” or “days” shall mean calendar days, (v) all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined, and (vi) all references to a “Loan Document” shall mean such document as it is constituted as of the Funding Date, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. The use of the phrases “upon the occurrence of an Event of Default,” “Event of Default exists,” “Event of Default has occurred,” “Event of Default shall have occurred and remain uncured” or similar phrases in this Agreement or the other Loan Documents are intended to mean that an Event of Default will only cease to exist following acceptance by Lender, in its discretion (unless acceptance of a cure and reinstatement is mandatory under applicable law), of a cure of such Event of Default upon such terms and conditions as Lender may require in its discretion (with any such acceptance of a cure of an Event of Default to be evidenced by a written reinstatement confirmation issued by Lender), and use of any of the foregoing phrases does not mean that Borrower, Carveout

Indemnitor or any other Person has the right to any additional grace periods or cure rights following the occurrence of an Event of Default or that Lender is obligated under any circumstance to accept any cure offered by Borrower, Carveout Indemnitor or any other Person following the occurrence of an Event of Default (unless acceptance of a cure and reinstatement is mandatory under applicable law).

Section 1.3. Lender’s Discretion. When used in this Agreement and the other Loan Documents, unless otherwise specifically qualified by a reasonableness standard, the phrase (a) “satisfactory to Lender” (or comparable phrases) shall mean “in form and substance satisfactory to Lender in all respects as determined by Lender in the exercise of its sole and absolute discretion,” (b) “with Lender’s consent” or “with Lender’s approval” (or comparable phrases) shall mean such consent or approval may be granted or withheld in Lender’s sole and absolute discretion, and (c) “acceptable to Lender,” “in Lender’s discretion” or “in Lender’s judgment” (or comparable phrases) shall mean acceptable to Lender, at Lender’s discretion and/or determined by Lender, in each instance in Lender’s sole and absolute judgment or discretion. Lender agrees that if Lender has expressly agreed not to unreasonably withhold its consent or approval on a particular issue, then use of the phrase “not to be u nreasonably withheld” or comparable phrases in this Agreement or the other Loan Documents shall mean “not to be unreasonably withheld, conditioned or delayed”; provided, however, that if Lender shall fail or refuse to give consent or approval, Borrower shall not be entitled to any damages for any withholding or delay in issuance of such approval or consent, and Borrower’s sole remedy shall be to bring an action seeking injunction or specific performance.

Section 1.4. Knowledge of Borrower Parties. For purposes of the Loan Documents, the phrases “to Borrower’s knowledge”, “to Carveout Indemnitor’s knowledge”, “to Grantor’s knowledge”, “to Assignor’s knowledge”, “to Indemnitor’s knowledge”, or comparable phrases (including “to the best of” a Person’s knowledge) shall mean with respect to Borrower and Carveout Indemnitor, the current knowledge of Carl E. Berg or Raymond V. Marino, who are Authorized Representatives of one or more Borrower Parties and are charged with responsibilities relating to the acquisition, ownership, management and operation of the Portfolio, after reasonable and prudent inquiry consistent with each of their management responsibilities, including inquiry of the Property Manager (if any), but without any personal liability of any such individual to Lender.

ARTICLE 2.

LOAN TERMS

Section 2.1. The Loan

(a) The Loan evidenced by the Note shall be funded and repaid in accordance with this Agreement, and any amount borrowed and repaid under this Agreement may not be re-borrowed. The proceeds of the Loan shall be used for the purposes set forth on the Closing Statement attached hereto as Exhibit B.

(b) The Loan shall be made upon Lender’s receipt, review, approval and/or confirmation of each of the following:

(i) Each of the items specified in Section 5 of the Application and/or on the preliminary closing agenda circulated by Lender’s legal counsel (as the same may be amended from time to time prior to the Funding Date), each to be delivered at Borrower’s cost and expense within the time periods specified in Section 5 of the Application, and each in form and content reasonably satisfactory to Lender;

(ii) The Closing Affidavit executed by an Authorized Representative of Borrower and by an Authorized Representative of Carveout Indemnitor, confirming that (a) since the date of the Application (1) no material, adverse change has occurred in the financial condition of any Borrower Party or in the Net Operating Income of any Property; (2) no condemnation or adverse zonin g or usage change proceeding has been initiated or, to the knowledge of Borrower Parties, has been threatened against any Property; (3) no Property has suffered any material damage by fire or other casualty which has not been fully repaired; and (4) to the knowledge of Borrower Parties, no law, regulation, ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter has been enacted, adopted,

or threatened by any Governmental Authority, which could reasonably be anticipated to have a material, adverse effect on any Borrower Party and/or any Property; (b) to the knowledge of Borrower Parties, no Event of Default exists as of the Funding Date; (c) no Leases currently exist in connection with any Property other than as set forth in the Rent Roll; and (d) all fees and commissions payable to real estate brokers, mortgage brokers, or any other brokers or agents in connection with the Loan have been paid or will be paid on the Funding Date, except for the fees and other costs incurred by the Borrower and Lender in connection with any Excess Collateral Release;

(iii) The Closing Statement, showing total costs relating to closing of the Loan and all uses of the proceeds of the Loan in all material respects;

(iv) Payment of Lender’s costs and expenses in documenting and closing the Loan, including fees and expenses of Lender’s inspecting engineers, appraiser, consultants, and outside legal counsel;

(v) If the Funding Date occurs on a date other than the first (1st) calendar day of a month, stub period interest for the period from the Funding Date to and including the last day of the calendar month in which the Funding Date occurs;

(vi) Such other reasonable documents, items or information as Lender or its counsel may require; and

(vii) Evidence of compliance with the other terms and conditions specified in this Agreement or any other Loan Document.

Section 2.2. Interest Rate; Late Charge

(a) The outstanding principal balance of the Loan shall bear interest at the rate of six and twenty-one one hundredths percent (6.21%) per annum.

(b) Interest shall be computed for the calendar month immediately preceding the applicable Payment Date or the Maturity Date on the basis of a fraction, the denominator of which is three hundred sixty (360) and the numerator of which is thirty (30) (except for any partial month, in which case the numerator shall be the actual number of days which have then elapsed during the period in question). Each determination by Lender of the amount of interest due and payable on each Payment Date shall be conclusive and binding for all purposes, absent manifest error.

(c) If Lender does not receive any installment of Debt Service or Impounds (if any Impounds are required) by 2:00 p.m. (Hartford, Connecticut time) on the fifth (5th) calendar day of the month in which such installment is due (excluding the full amount of the Obligations due on the Maturity Date, for which no late charge or grace period shall apply), Borrower shall pay to Lender, within the Demand Period, a one-time late charge on such overdue amount (for the additional expense, time and effort in collecting and handling such overdue payment, as liquidated damages and not as a penalty) equal to the lesser of (i) the maximum amount permitted by applicable law, a nd (ii) five percent (5%) of such delinquent amount. Any such late charge shall be in addition to, and not in lieu of, interest at the Default Rate and any other rights, powers and remedies available to Lender and shall be in addition to any attorneys’ fees and expenses incurred by Lender in connection with such overdue payment. During the existence of any Event of Default, the Loan shall bear interest at the Default Rate.

Section 2.3. Terms of Payment; Maturity Date

(a) The Loan shall be payable as follows:

(i) Commencing on the first Payment Date and continuing to and including the Payment Date immediately preceding the Maturity Date, Borrower shall pay to Lender level monthly payments of principal and interest in the amount of Eight Hundred Thirty-Seven Thousand Eight Hundred Eighty-Eight and 48/100 Dollars ($837,888.48) each, representing interest, cal culated in arrears for the calendar month

immediately preceding such Payment Date in accordance with Section 2.2(b), and principal in monthly installments in accordance with an assumed 20-year amortization schedule.

(ii) From and after the payment of any Partial Release Prepayment, the amount of the monthly payments of interest and/or principal shall be recalculated by Lender and shall be based on the then-outstanding principal balance of the Loan as of such prepayment date over an assumed amortization period of 240 months minus the number of months elapsed since the first Payment Date.

(b) On the Maturity Date, Borrower shall pay to Lender all principal outstanding under the Note or otherwise in respect of the Loan, accrued and unpaid interest, and all other Obligations due under the Loan Documents.

(c) Except during the existence of any Event of Default, all payments received by Lender under the Loan Documents shall be applied: first, to any fees and expenses due to Lender under the Loan Documents, including any Applicable Prepayment Fee; second, to any Default Rate interest and/or late charges; third, to Impounds (if any are required pursuant to the terms of the Loan Documents); fourth to accrued a nd unpaid interest under the Note; fifth, to the principal sum of the Note, and sixth, to any other amounts due under the Loan Documents. During the existence of an Event of Default, payments received by Lender may be applied to the Obligations in the order or amounts determined by Lender in its discretion.

(d) Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 2:00 p.m. (Hartford, Connecticut time) on the date when due and shall be made in lawful money of the United States of America by wire transfer in federal or other immediately available funds to its account at such bank(s) as Lender may from time to time designate by delivering written notice to Borrower. Any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day. All payments made by Borrower hereunder, or by a ny Borrower Party under the other Loan Documents, shall be made irrespective of, and without any deduction for, any defenses, set-offs or counterclaims. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the payment may be made on the next succeeding Business Day.

Section 2.4. Prepayment

(a) Except as expressly hereinafter set forth in this Section 2.4 or as otherwise provided in Sections 3.2(i), 3.3, 7.5, 7.15 or 9.3, no full or partial prepayments of the principal balance of the Note shall be allowed.

(b) At any time following the last day of the Lockout Period (or on and after October 1, 2009 in connection with a Partial Release pursuant to Section 7.15), upon issuance of a Prepayment Notice, Borrower shall have the right to prepay the outstanding principal balance of the Note in full (but not in part, except as expressly permitted in Sections 3.2(i), 3.3, 7.5, 7.15 or 9.3) on any Business Day by paying the sum of (i) the entire remaining outstanding principal balance of the Note, plus (ii) all unpaid interest accrued on the prepayment amount, plus (iii) all other Obligations, plus (iv) a prepayment fee equal to the Applicable Prepayment Fee.

(c) Each Prepayment Notice shall specify the intended date of prepayment, which date shall be a Business Day. After delivery of a Prepayment Notice, the amounts payable under Section 2.4(b) shall be due and payable in full on the date specified in such Prepayment Notice unless a Borrower Party delivers a written revocation notice to Lender at least three (3) Business Days prior to the scheduled prepayment date, and failure to pay the same in full on such date without proper revocation shall, at Lender’s option, constitute an Event of Default, without notice or opportunity to cure. If the amounts necessary to prepay the Loan in accor dance with the terms and provisions hereof are received by Lender after 2:00 p.m. (Hartford, Connecticut time), such prepayment shall be deemed to have been made on the next occurring Business Day and Lender shall be entitled to (i) recalculate the Applicable Prepayment Fee associated with such prepayment, and (ii) receive interest on the outstanding principal balance to be prepaid, calculated at the Contract Rate or the Default Rate, as applicable, through the effective date of such prepayment.

(d) Notwithstanding anything to the contrary set forth in this Agreement or any other Loan Document, at any time between July 1, 2018 and the Scheduled Maturity Date, upon issuance of a Prepayment Notice, Borrower shall have the right to prepay the outstanding principal balance of the Loan in full (but not in part, except as expressly permitted in Sections 3.2(i), 3.3, 7.5, 7.15 or 9.3), without premium or additional fees or expenses (including any Applicable Prepayment Fee), by paying the entire remaining outstanding principal balance of the Loan, all accrued and unpaid interest hereunder, and all other Obligations (provided that Borrower shall not be entitled to t he benefit of the above-described open prepayment period when calculating the Applicable Prepayment Fee for any prepayment that is tendered at any time prior to said open prepayment period).

(e) Borrower acknowledges that it possesses no right to prepay the Loan, except as expressly provided in this Section 2.4 or as otherwise provided in Sections 3.2(i), 3.3, 7.5, 7.15 or 9.3. Borrower further acknowledges and agrees that, except as so expressly provided, if the Loan is prepaid prior to July 1, 2018, for any reason (including acceleration of the Scheduled Maturity Date by reason of an Event of Default), any subsequent tender of payment of the Loan made by Borrower or by any Person on behalf of Borrower or otherwise, including any tender of payment at any time prior to or at foreclosure sale or proceedings or during any redemption period foll owing foreclosure, or during any federal or state bankruptcy or insolvency proceedings, shall constitute an evasion of the restrictions on prepayment set forth herein, and shall be deemed a voluntary prepayment prior to the Scheduled Maturity Date requiring payment of the Applicable Prepayment Fee, and Lender shall not be required to accept such prepayment if it does not include payment of the Applicable Prepayment Fee.

(f) If any actual or deemed prepayment is tendered or deemed tendered during the Lockout Period (other than a prepayment tendered or deemed tendered pursuant to Sections 3.2(i), 3.3, 7.5, 7.15 or 9.3), Borrower shall be obligated to pay Lender, and the Obligations shall include, a prepayment fee (the “Lockout Prepayment Fee”) calculated by Lender in its discretion (which may or may not equal the Standard Yield Maintenance otherwise due in connection with any such prepayment but for the operation of the Lockout Period), and Lender shall not be required to accept such payment or credit any deemed paym ent if it does not include payment of the Lockout Prepayment Fee as calculated by Lender. Any prepayment tendered during the Lockout Period in connection with a Partial Release pursuant to Section 7.15 must include a prepayment fee equal to Lockout Yield Maintenance.

(g) Lender’s acceptance of a prepayment without the Applicable Prepayment Fee shall not constitute or be deemed to constitute a waiver by Lender of its right to require payment of the Applicable Prepayment Fee in accordance with the terms hereof or a waiver of any rights and remedies Lender may have under the Loan Documents, at law or in equity on account of Borrower’s failure to timely pay the Applicable Prepayment Fee as and when required hereunder.

(h) To the extent permitted by law, Lender may bid at any foreclosure sale, as part of the Obligations, the amount of the Applicable Prepayment Fee calculated as if prepayment of the Loan occurs on the date of such foreclosure sale. To the extent the amount of the Obligations must be determined as of a date certain pursuant to a judicial foreclosure, the Loan will be deemed prepaid as of the date judgment enters and the Applicable Prepayment Fee due and payable hereunder (if any) will be calculated as if prepayment of the Obligations occurred on the date of said judgment.

(i) Borrower and Lender have negotiated the Loan upon the understanding that if the Loan is paid or prepaid prior to July 1, 2018 for any reason, except as expressly provided in this Section 2.4 or as otherwise provided in Sections 3.2(i), 3.3, 7.5, 7.15 or 9.3, Lender shall receive the Applicable Prepayment Fee as compensation for: (i) the cost of reinvesting the prepayment proceeds and the loss of the contracted rate of return on the Loan; and (ii) the privilege of early payment of the Loan, which Borrower has expressly bargained for and which privilege Lender would not have granted to Borrower without Borrower’s obligation to pay t he Applicable Prepayment Fee. Borrower agrees that the Applicable Prepayment Fee provided for herein is reasonable and that Lender shall not be obligated, as a condition subsequent to its receipt of the Applicable Prepayment Fee, to actually reinvest all or any part of the amount prepaid in any United States Treasury instruments or obligations or otherwise.

ARTICLE 3.

INSURANCE, CONDEMNATION, AND IMPOUNDS

Section 3.1. Insurance.

(a) Insurance Coverage. Borrower shall obtain and maintain, or cause to be maintained, insurance for each Individual Borrower, Lender, each Property and the other Collateral (collectively, the “Insurance”) providing at a minimum the following:

(i) Insurance with respect to the Improvements and Personal Property relating to each Property against any peril currently included within the classification “All Risk” or “Special Perils,” in each case (1) in an amo unt equal to 100% of the “Full Replacement Cost,” which for purposes of this Agreement shall mean actual replacement value (exclusive of costs of excavations, foundations, underground utilities and footings) with losses adjusted on a replacement cost basis; (2) containing an agreed amount endorsement (unless waived by Lender in its reasonable discretion) with respect to the Improvements and Personal Property relating to such Property waiving all co-insurance provisions; (3) providing for no deductible in excess of $25,000 and no self-retention (unless disclosed to and approved by Lender); (4) with an “Ordinance or Law Coverage” or “Enforcement” endorsement (including demolition costs); and (5) with coverage for “mold” and related damage with reasonable and customary limits (a sublimit of $1,000,000 for “mold” coverage being deemed “reasonable”). The Full Replacement Cost of each Property shall be evaluated from time to time at the request of Lender (but not more frequently than once in any twelve (12) calendar months, unless an Event of Default exists, in which case the Full Replacement Cost may be evaluated from time to time as Lender in its discretion may deem necessary) by an appraiser or contractor designated and paid by Borrower and approved by Lender, such approval not to be unreasonably withheld (unless an Event of Default exists, in which case the appraiser or contractor shall be designated by Lender and paid by Borrower). No omission on the part of Lender to request any such ascertainment of the Full Replacement Cost for any Property shall relieve Borrower of any of its obligations under this Subsection 3.1(a)(i);

(ii) Commercial general liability insurance against all claims for personal injury or property damage occurring upon, in or about each Property, including “Dram Shop” or other liquor liability coverage if alcoholic beverages are sold from or may be consumed at any Property and garage keepers’ liability coverage (if applicable), such insurance (1) to be on the so-called “occurrence” form with a general aggregate limit of not less than $2,000,000.00 and a per occurrence limit of not less than $1,000,000.00; (2) to be continued at not less than the aforesaid limit until required to be increased by Lender in writing by reason of changed economic conditions making such protection inadequate (in the reasonable estimation of Lender); and (3) to cover at least the following hazards: (A) premises and operations (including Fire Damage Legal Liability); (B) products and completed operations on an “if any” basis; (C) independent contractors; (D) blanket contractual liability for advertising and all written and oral contracts to the extent of tort liability; and (E) contractual liability covering the indemnities contained in the Loan Documents to the extent the same is available;

(iii) Business interruption/loss of rents insurance (1) with loss payable to Lender; (2) covering “All Risks” or “Special Perils” as required to be covered by the insurance provided for in Subsection 3.1(a)(i) and (i i); (3) in an amount equal to 100% of the projected gross income from each Property (on an actual loss sustained basis) for a period of not less than twelve (12) months following the date of loss (the amount of such coverage shall be determined prior to the Funding Date and at least once each year thereafter based on the greater of: (x) reasonable estimate by Borrower Parties of the gross income from each Property for the succeeding twelve (12) month period, and (y) the highest gross income received during the term of the Note for any consecutive twelve (12) month period prior to the date the amount of such insurance is being determined); (4) with a deductible of not greater than an amount equal to 48 hours loss; and (5) containing an extended period of indemnity endorsement which provides that after the physical loss to the affected Improvements has been repaired, the continued loss of income will be insured until the earlier of such income returning to the same level it was at prior to the loss or the expi ration of one

hundred eighty (180) days from the date that normal operations are resumed at the affected Property (notwithstanding that the policy may expire prior to the end of such period). All insurance proceeds payable to Lender pursuant to this Subsection 3.1(a)(iii) shall be held by Lender and shall be applied to the Obligations from time to time due and payable under the Note and this Agreement; provided, however, that so long as no Event of Default exists, Lender shall disburse to the applicable Individual Borrower, on a monthly basis (consistent with an annual operating budget delivered to Lender) funds representing business interruption proceeds (to the extent actually received by Lender) for payment of Operating Expenses and Debt Service upon receipt by Lender of a written request for disbursement from the applicable Individual Borrower, summarizing the Operating Expenses and/or Debt Service to be paid with the subject disbursement; provided, further, that nothing herein contained shall be deemed to relieve Borrower of its obligation to pay the Obligations on the respective dates of payment provided for in the Note and this Agreement except to the extent such amounts are actually paid to and retained by Lender out of the proceeds of such business interruption insurance;

(iv) At all times during which structural construction, repairs or alterations are being made with respect to any Property, applicable contractors shall provide: (1) owner’s and contractor’s protective liability insurance covering claims not covered by or under the terms or provisions of the commercial general liability insurance policy ref erenced in Subsection 3.1(a)(ii); and (2) the insurance provided for in Subsections 3.1(a)(i) and (iii), written in a so-called “builder’s risk completed value form” (A) on a non-reporting basis, (B) against “All Risks” or “Special Perils” as required pursuant to Subsection 3.1(a)(i), (C) including permission to occupy such Property, and (D) with an agreed amount endorsement waiving co-insurance provisions;

(v) To the extent required by applicable Legal Requirements, workers’ compensation, subject to the statutory limits of the State, and employer’s liability insurance with a limit of at least $1,000,000.00 per accident and per disease per employee, and $1,000,000.00 for disease aggregate in respect of any work or operations on or about each P roperty, or in connection with each Property or its operation (if applicable);

(vi) Comprehensive boiler and machinery insurance in customary and reasonable amounts (to the extent Lender, in the exercise of its reasonable judgment, deems such coverage reasonably necessary based on the equipment at a particular Property);

(vii) If any portion of any Property is at any time located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each m ay be amended, or any successor or comparable law (the “Flood Insurance Acts”), flood hazard insurance in an amount equal to the lesser of (1) 100% of the “Full Replacement Cost,” determined in accordance with the provisions of Subsection 3.1(a)(i), and (2) the maximum limit of coverage available for such Property under the Flood Insurance Acts;

(viii) Umbrella liability insurance in an aggregate amount of not less than $25,000,000.00 per occurrence, and with deductibles (including any self insurance or retention) and on terms consistent with the commercial general liability insurance policy required under Subsection 3.1(a)(ii); and

(ix) Such other insurance (other than terrorism or earthquake insurance) and in such amounts as Lender from time to time may reasonably require against such other insurable hazards which at the time are commonly insured against for properties similar to each Property located in or around the region in which the Portfolio is located.

(b) Policies. All insurance provided for in Subsection 3.1(a) shall be obtained under valid and enforceable policies (collectively, the “Policies” and individually, a “Policy”), in such forms and, from time to time after the Funding Date, in such amounts as may be satisfactory to Lender (in the exercise of its reasonable judgment), issued by financially sound and responsible insurance companies authorized and admitted to do business in the State, having a general policy rating of “A” or better and a financial class of “X” or better, each as determined by AM Best Company, Inc., and otherwise acceptable to Lender in the exercise of its reasonable judgment (each such insurer satisfying the foregoing is referred to below as a “Qualified Insurer”). Not less than ten (10) days

prior to the expiration dates of the Policies in force as of the Funding Date, Borrower shall deliver to Lender certificates (in ACORD format 25 and ACORD format 28 (2003/10 form)) evidencing renewal Policies complying with the requirements of this Section 3.1, such certificates to be in format reasonably required by Lender and to be marked “premium paid” (or Borrower shall provide other evidence satisfactory to Lender (in its reasonable judgment) of the payment in full of all premiums due under such Policies (the “Insurance Premiums”)).

(c) Blanket Policies. Borrower shall not obtain (i) any blanket liability or casualty Policy unless, in each case, such Policy is approved in advance by Lender (Lender acknowledges its approval of the blanket policies in effect as of the Funding Date, and Lender’s approval of Borrower’s blanket Policies following the Funding Date will not be required so long as any replacement blanket Policy is substantially similar to the blanket Policy approved by Lender on the Funding Date, confirmed by the ACORD certif icates described in Section 3.1(b)), or (ii) without Lender’s prior written consent (issued or withheld in Lender’s reasonable judgment), separate insurance concurrent in form or contributing in the event of loss with that required in Subsection 3.1(a). If a Borrower Party obtains separate insurance or a blanket Policy, Borrower shall notify Lender of the same and shall cause certificates with respect to each Policy to be delivered to Lender as required in Subsection 3.1(b).

(d) Lender as Insured. All Policies, except for the Policies referenced in Subsection 3.1(a)(v), shall name the applicable Individual Borrower as the named insured and Lender as an additional insured and loss payee, as their respective interests may appear, and in the case of property damage, boiler and machinery, builder’s risk, and flood insurance, shall contain a so-called “New York standard non-contributing mortgagee” clause in favor of Len der providing that any loss thereunder covered by such Policy shall be payable to Lender.

(e) Policy Endorsements. All Policies shall contain clauses or endorsements to the effect that:

(i) No act or negligence of any Borrower Party, of anyone acting for a Borrower Party, or of any Tenant, or failure to comply with the provisions of any Policy that might otherwise result in a forfeiture of the insurance or any part thereof, shall in any way affect the validity or enforceability of the insurance insofar as Lender is concerned;

(ii) No Policy may be materially changed (other than to increase the coverage provided thereby) or cancelled without at least thirty (30) days prior written notice to Lender and any other party named therein as an insured or additional insured;

(iii) The issuers thereof shall give written notice to Lender if the Policy has not been thirty (30) days prior to its expiration; and

(iv) Lender shall not be liable for any Insurance Premiums or assessments thereon, except that Lender may, but shall have no obligation to, pay any Insurance Premiums to continue any Policy in full force and effect in the event Borrower fails to do so (any such amounts so paid by Lender shall be paid by Borrower to Lender within the Demand Period , and until paid shall constitute part of the Obligations, shall be secured by the Loan Documents and shall bear interest at the Default Rate accruing from the expiration of the Demand Period until Lender receives payment in full of such amount).

(f) Intentionally Omitted.

(g) Lender Self-Help. If at any time Lender is not in receipt of written evidence that all Insurance required hereunder is in full force and effect, Lender shall have the right, upon three (3) Business Days prior notice to Borrower, to take such action as Lender deems necessary to protect its interest in the Portfolio, including obtaining such Insurance as Lender, in its discretion, deems appropriate, and all expenses incurred by Lender in connection with such action or in obtaining and maintaining such Insurance shall be paid by Borrower to Lender before the expiration of the Demand Period, and until paid shall constitute part of the Obligations, shall be secured by the Loan Documents and shall bear interest at the Default Rate from the expiration of the Demand Period until Lender receives payment in full of such amount.

(h) Vesting in Lender. In the event of a foreclosure or other transfer of title to any Property to Lender or a third party purchaser at foreclosure in extinguishment in whole or in part of the Obligations, and to the extent permitted under the Policies, all right, title and interest of Borrower Parties in and to all proceeds payable pursuant to the Policies as of the effective date of transfer of title (including proceeds payable under blanket policies) shall thereupon vest exclusively in Lender or the purchaser at su ch foreclosure.

(i) Subrogation. All Insurance (as applicable) and all renewals thereof shall contain, in form and substance reasonably acceptable to Lender, a standard “Waiver of Subrogation” endorsement.

Section 3.2. Use and Application of Insurance Proceeds.

(a) Restoration. If any portion of any Property (or any material portion of the other Collateral) shall be damaged or destroyed, in whole or in part, by fire or other casualty (a “Casualty”), Borrower shall give prompt written notice of such damage to Lender. If Net Proceeds are made available to a Borrower Party for Restoration as provided in Subsections 3.2(c) and 3.2(d), the applicable Individual Borrower shall, in accordance with the te rms of this Section 3.2, promptly commence and diligently prosecute to completion the repair and restoration of the affected Collateral as nearly as possible to the condition the affected Collateral was in immediately prior to such Casualty (such repair and restoration, collectively, a “Restoration”) and shall pay all costs of such Restoration (even if Net Proceeds are not sufficient to pay in the full the cost of Restoration). Regardless of whether Net Proceeds are made available to any Individual Borrower, Borrower shall, promptly following the occurrence of a Casualty and diligently thereafter, undertake all actions necessary to keep the affected Property safe, secure and free from reasonably foreseeable hazards and otherwise in material compliance with applicable Legal Requirements. Notwithstanding any Casualty, Borrower shall continue to pay the Obligatio ns at the time and in the manner provided for its payment in this Agreement.

(b) Adjustments by Lender. Upon any Casualty covered by any Insurance, then (i) if an Event of Default exists, Lender is hereby authorized, at its option (exercisable in its discretion), to settle and adjust any claim without the consent of Borrower Parties; or (ii) if the Casualty in question is a Major Damage Event, Lender shall allow the applicable Individual Borrower up to one hundred eighty (180) days following the occurrence of the Casualty to settle and adjust such claim with the prior written consent of Lender (such consent not to be unreasonably withheld); provided, however, that if the applicable Individual Borrower has failed to settle and adjust any claim associated with a Casualty within one hundred eighty (180) days after the occurrence of such Major Damage Event, Lender is hereby authorized, at its option (exercisable in its reasonable discretion), to settle and adjust any claim with the prior written consent of the applicable Individual Borrower (such consent not to be unreasonably withheld); provided, further, that in any case, Lender shall, and is hereby authorized to, collect and hold (without interest) any and all such insurance proceeds subject to the terms of this Section 3.2. If a Casualty does not constitute a Major Damage Event, t hen the applicable Individual Borrower shall diligently pursue settlement of all insurance claims, shall hold all Net Proceeds associated with such non-Major Damage Event in trust to be applied toward the costs associated with the restoration of the affected Property, and shall promptly commence and diligently pursue to completion all restoration and repair work reasonably necessary to return the affected Property to the condition it was in immediately prior to the non-Major Damage Event. The applicable Individual Borrower shall provide Lender with reasonable written updates, at reasonable intervals, in connection with all restoration efforts associated with non-Major Damage Events. The reasonable third party expenses incurred by Lender in the adjustment and collection of insurance proceeds shall be reimbursed by Borrower to Lender within the Demand Period and until paid shall constitute part of the Obligations, shall be secured by the Loan Documents and shall bear interest at the Defau lt Rate from expiration of the Demand Period until payment in full is received by Lender, or, to the extent sufficient insurance proceeds are available, said expenses shall be deducted from said proceeds by Lender prior to any other application thereof. Each Qualified Insurer is hereby authorized and directed by Borrower to make payment for all losses associated with a Major Damage Event to Lender alone, and not to Lender and any Individual Borrower or any other Person jointly. Borrower agrees to promptly execute and deliver to Lender all documents and promptly make all deliveries reasonably requested by Lender in order to permit Lender to adjust any such claim and to authorize and direct any insurer to pay insurance proceeds relating to a Major Damage Event to Lender alone and not jointly to Lender and any Individual Borrower or any other Person. “Net Proceeds” means the net amount of all insurance proceeds received by Lender under the Policies described in Subsections 3.1(a) as a result of a Casualty, after deduction of Lender’s reasonable third party costs and expenses (including reasonable attorneys’ fees), if any, in collecting same.

(c) Conditions to Disbursements for Restoration. The following provisions shall apply in connection with any Restoration of a Major Damage Event:

(i) Lender shall make the Net Proceeds associated with a Major Damage Event available to the applicable Individual Borrower for Restoration, provided that each of the following conditions are satisfied (satisfaction to be determined by Lender in the exercise of its reasonable judgment):

(A) As of the date of each distribution of Net Proceeds, no monetary Potential Default (which solely for the purposes of this provision means a failure to make a payment of a liquidated sum of money on the due date thereof but for which the applicable grace period has yet to expire) then exists and no Event of Default then exists;

(B) Within ninety (90) days following the occurrence of the Casualty, the applicable Individual Borrower shall prepare, or shall cause to be prepared, all required Restoration Documents and applications for the issuance of all permits required for the Restoration, with copies thereof delivered to Lender;

(C) Lender and the Casualty Consultant shall have approved the Restoration Documents in accordance with Subsection 3.2(e);

(D) As of the date of each distribution of Net Proceeds, Lender shall be satisfied, in the exercise of its reasonable judgment, that based upon a report issued by the Casualty Consultant and such other factors as Lender reasonably deems relevant, the costs of Restoration and ongoing Operating Expenses (including Debt Service) allocated to the affected Property will be covered out of (1) undisbursed Net Proceeds (including the proceeds of the coverage referred to in Subsection 3.1(a)(iii)), (2) Rents that are and shall continue to be generated by the affected Property despite the Casualty, and/or (3) other funds of Borrower deposited with Lender pursuant to Subsect ion 3.2(g);

(E) Prior to the initial disbursement of Net Proceeds, Lender shall be satisfied that, within six (6) months following completion of the Restoration, the Net Operating Income associated with the affected Property will be restored to a level sufficient to generate a Debt Service Coverage Ratio (based on a fully amortizing 20-year schedule) for such affected Property of at least 125%;

(F) Prior to the initial disbursement of Net Proceeds, Lender shall be satisfied that the Restoration will be completed on or before the earliest to occur of (1) six (6) months prior to the Maturity Date, (2) twelve (12) months after the occurrence of the Casualty, or (3) such time as may be required under all Legal Requirements in order to repair and restore the affected Collateral to the condition it was in immediately prior to such Casualty;

(G) Prior to the initial disbursement of Net Proceeds, Borrower shall execute and deliver to Lender a completion guaranty in form and substance reasonably satisfactory to Lender and its counsel, pursuant to which Borrower shall guaranty to Lender the lien-free completion of the Restoration in accordance with the provisions of this Section 3.2;

(H) Prior to the initial disbursement of Net Proceeds, Lender shall be satisfied that the affected Property and the use thereof after the Restoration will be in compliance (in all material respects) with and permitted under all Legal Requirements;

(I) Prior to the initial disbursement of Net Proceeds, Lender shall be satisfied that the Restoration shall be undertaken and completed such that no Lease (or combination of Leases), which are in place at the affected Property as of the date of the Casualty and which cover (singularly or in the aggregate) 25% or more of the gross rentable area of the affected Property, can be terminated as a result of the Casualty;

(J) Promptly following the issuance of all required permits and the decision of Lender to make Net Proceeds available for Restoration in accordance with this Subsection 3.2(c), the applicable Individual Borrower shall commence the Restoration;

(K) As of the date of each distribution of Net Proceeds, Lender shall be satisfied (in the exercise of its reasonable judgment) that the applicable Individual Borrower is diligently pursuing the Restoration to satisfactory completion; and

(L) As of the date of each distribution of Net Proceeds, Borrower must be in compliance with the conditions specified in Subsections 3.2(d), (e) and (g) below.

(d) Disbursement Procedures. The Net Proceeds shall be held by Lender (in a non-interest bearing account) and, unless and until disbursed to the applicable Individual Borrower in accordance with the provisions of this Section 3.2, shall constitute additional security for the Obligations. Subject to satisfaction of the conditions of this Section 3.2, the Net Proceeds designated for Restoration costs shall be disbursed by Lender to, or as directed by, the applicable Individual Borrower from time to time prior to or during the course of the Restoration, but not more than once per 30-day period, upon receipt of (i) a disbursement request from the applicable Borrower Party in form and content reasonably required by Lender, (ii) an inspection report from the Casualty Consultant acceptable to Lender (in the exercise of its reasonable judgment), (iii) evidence reasonably satisfactory to Lender that all materials installed and work and labor performed in connection with the related Restoration item have been paid for in full (except to the extent that they are to be paid for out of the requested disbursement), including a certification from the applicable Individual Borrower that there exist no notices of pendency, stop orders, mechanic’s or material supplier’s liens or notices of intention to file same, or any other liens or encumbrances of any nature whatsoever on the affected Property which have not either been fully bonded to the reasonable satisfaction of Lender and discharged of record or, in the alte rnative, fully insured to the reasonable satisfaction of Lender by the Title Company, and (iv) title insurance “date downs” and endorsements to the Title Policy without exception as to mechanics’ or material supplier’s liens, intervening choate or inchoate liens, judgments, survey matters, or other material matters of record. Any Net Proceeds received by Lender and held for application to Operating Expenses and Debt Service shall be disbursed to the applicable Individual Borrower in accordance with Subsection 3.1(a)(iii). All Net Proceeds disbursed to a Borrower for Restoration shall be held in trust by the recipient and used for the sole purpose of completion of the Restoration in accordance with the provisions of this Section 3.2.

(e) Restoration Documents. All plans and specifications and construction agreements (collectively, “Restoration Documents”) necessary for the Restoration shall be subject to prior review and approval by Lender and by a qualified independent consulting engineer selected by Lender (the “Casualty Consultant”), all such approvals not to be unreasonably withheld. In the event Le nder does not notify the applicable Individual Borrower of the approval or disapproval by Lender and the Casualty Consultant of the Restoration Documents within ten (10) Business Days after receipt of a complete set thereof by Lender and the Casualty Consultant, then Lender and the Casualty Consultant shall be deemed to have approved the Restoration Documents. Subject to all necessary approvals and consents (the consent of Borrower Parties being deemed issued), Lender shall have the use of the Restoration Documents and all permits, licenses and approvals required or obtained in connection with the Restoration. The identity of the general contractor and other significant contractors engaged in the Restoration shall be subject to prior review and approval by Lender and the Casualty Consultant (each such approval not to be unreasonably withheld). All reasonable third party costs and expenses incurred by Lender in connection with making the Net Proceeds available for the Restorat ion or for the payment of Operating Expenses, including reasonable third party attorneys’ fees and disbursements and the Casualty Consultant’s reasonable fees (which in no event shall exceed then prevailing market rates), shall be deducted from the Net Proceeds or if the Net Proceeds are not sufficient, paid by Borrower to Lender within the Demand Period and until paid shall constitute part of the Obligations, shall be secured by the Loan Documents and shall bear interest at the Default Rate from the expiration of the Demand Period until payment in full is received by Lender.

(f) Amount of Disbursements. In no event shall Lender be obligated to make disbursements of the Net Proceeds in excess of an amount equal to the costs actually incurred from time to time for work in place as part of the Restoration (including Lender’s reasonable third party costs and expenses), as certified by the Casualty Consultant, minus the Restoration Retainage. “Restoration Ret ainage” means an amount equal to the greater of (i) ten percent (10%) of the costs actually incurred for work in place as part of the Restoration, as certified by the

Casualty Consultant, and (ii) the amount actually held back by the applicable Individual Borrower from contractors, subcontractors and material suppliers engaged in the Restoration. The Restoration Retainage shall not be released until the Casualty Consultant certifies to Lender that the Restoration has been substantially completed in accordance with the provisions of this Section 3.2 and that all approvals necessary for the re-occupancy and use of the affected Property have been obtained from all appropriate Governmental Authorities, and Lender receives evidence reasonably satisfactory to Lender that the costs of the Restoration have been paid in full or will be paid in full out of the Restoration Retainage, provided, however, that Lender will release the portion of the Restoration R etainage being held with respect to any contractor, subcontractor or material supplier engaged in the Restoration as of the date upon which either (i) the Casualty Consultant certifies to Lender that the contractor, subcontractor or material supplier has satisfactorily completed all work and has supplied all materials in accordance with the provisions of that contractor’s, subcontractor’s or material supplier’s contract, or (ii) the applicable contractor, subcontractor or material supplier delivers to Lender lien waivers and evidence of payment in full of all sums due to the contractor, subcontractor or material supplier as may be reasonably requested by Lender or by the Title Company. If required by Lender, the release of any such portion of the Restoration Retainage shall be approved by the surety company, if any, which has issued a payment or performance bond with respect to the contractor, subcontractor or material supplier.

(g) Restoration Deficiency. If at any time the Net Proceeds or the undisbursed balance thereof, together with Rents that will continue to be generated by the affected Property despite the Casualty, shall not, in the reasonable opinion of Lender in consultation with the Casualty Consultant, be sufficient to pay in full the balance of the costs estimated by the Casualty Consultant to be incurred in connection with the completion of the Restoration and ongoing Operating Expenses (including Debt Service) associated with t he affected Property, Borrower shall deposit the deficiency (the “Net Proceeds Deficiency”) with Lender before any further disbursement of the Net Proceeds shall be made (but in all events Borrower shall make such deposit within sixty (60) days following demand). The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration and/or for ongoing Operating Expenses (including Debt Service) associated with the affected Property on the same conditions applicable to the disbursement of the Net Proceeds, and until so disbursed shall constitute additional security for the Obligations.

(h) Release of Remaining Proceeds. Provided (i) no monetary Potential Default (which solely for the purpose of this provision means a failure to make a payment of a liquidated sum of money on the due date thereof but for which the applicable grace period has yet to expire) then exists and no Event of Default then exists, (ii) Lender shall re-confirm that within six (6) months following completion of the Restoration the Net Operating Income for the affected Property will be restored to a level sufficient to generate a Debt Service Coverage Ratio (based on a fully amortizing 20-year schedule) for such affected Property of at least 125%, (iii) the Casualty Consultant certifies to Lender that the Restoration has been substantially completed in accordance with the provisions of Section 3.2, and (iv) Lender receives evidence reasonably satisfactory to Lender that all costs incurred in connection with the Restoration have been paid in full (except to the extent said costs shall be paid out of the final disbursement), Lender shall promptly remit to the applicable Individual Borrower the excess, if any, of the Net Proceeds and the remaining balance, if any, of the Net Proceeds Deficiency deposited with Lender.

(i) Application of Remaining Proceeds. If Lender makes a determination (in the exercise of its reasonable judgment) pursuant to this Section 3.2 that one or more of the conditions to disbursement of Net Proceeds set forth in Subsection 3.2(c)(i) has not or will not be satisfied, then all Net Proceeds then held by Lender shall be retained and applied by Lender toward the payment of the Obligations, whether or not then due and payable in such order, priority and proportions as Lender in its reasonable discretion shall d eem proper. Provided no Event of Default has occurred and is continuing as of the date Lender applies the Net Proceeds to the Obligations, no Applicable Prepayment Fee shall be payable in connection with any such prepayment. If an Event of Default exists while Lender is holding Net Proceeds, Lender may at its option apply the Net Proceeds toward the payment of the Obligations, whether or not then due and payable in such order, priority and proportions as Lender in its discretion shall deem proper (including toward payment of any Applicable Prepayment Fee applicable to such prepayment). If Lender applies Net Proceeds to the Obligations, the lien of the Loan Documents shall be reduced only by the amount of Net Proceeds actually applied by Lender in reduction of the Obligations, but if the Net Proceeds do not discharge the Allocated Loan Amount relating only to the affected Property in full, then Lender may elect to accelerate repayment of, or Borrower may elect to prepay, the e ntire remaining outstanding balance of the Allocated Loan Amount relating only to the affected Property, such prepayment to be made in either case within one hundred twenty

(120) days following notice from the electing party to the other party (or such longer period as may be reasonably necessary for Borrower to secure replacement financing as long as Borrower Parties are diligently pursuing said refinancing in good faith), without any Applicable Prepayment Fee due thereon so long as no Event of Default exists as of either the date Lender so accelerates or Borrower elects prepayment of said Allocated Loan Amount and the date said Allocated Loan Amount is fully and finally repaid.

Section 3.3. Condemnation Awards. Borrower shall promptly notify Lender of the receipt by a Borrower Party of notice of the institution of any proceeding for the condemnation or other taking of any Property or any portion thereof. Lender may participate in any such proceeding relating to a Major Damage Event and the applicable Individual Borrower shall deliver to Lender all instruments necessary or required by Lender to permit such participation. Without Lender’s prior written consent (which consent shall not be unreasonably withheld), no Borrower Party, in connection with any Major Damage Event, shall agree to any compensation or award and/or take any action or fail to take any action which would cause the compensation to be determined. All awards and compensation for the taking or purchase in lieu of condemnation of any Property or any part thereof are hereby assigned to and shall be paid to Lender for application to the Obligations (except as expressly provided below). Borrower Parties authorize Lender to collect and receive such awards and compensation, to give proper receipts and acquittances therefor, and to apply the same toward the payment of the Obligations in such order, priority and proportions as Lender in its reasonable discretion shall deem proper (and provided no Event of Default exists as of the date Lender applies such condemnation proceeds to the Obligations, no Applicable Prepayment Fee shall be payable in connection with any such prepayment), notwithstanding that the Obligations may not then be due and payable; provided, however, that if the condemnation in question does not constitute a Major Damage Event and the applicable Individual Borrower requests that such proceeds be used for non-structural site improvements (such as landscape, driveway, walkway and parking area repairs) to the affected Property which are required to be made as a result of such condemnation, Lender will apply the award to such restoration in accordance with disbursement procedures applicable to Net Proceeds. Borrower Parties, upon request by Lender, shall execute all instruments reasonably requested by Lender to confirm the assignment of the awards and compensation to Lender, free and clear of all Liens, charges (except as expressly set forth above) or encumbrances. If Lender applies condemnation proceeds to the Allocated Loan Amount relating only to the affected Property, the lien of the Loan D ocuments shall be reduced only by the amount of such proceeds actually applied by Lender in reduction of the Obligations, but if such proceeds do not discharge the Obligations in full, then Lender may elect to accelerate repayment of, or Borrower may elect to repay, the entire remaining outstanding balance of the Allocated Loan Amount relating only to the affected Property, such prepayment to be made in either case within one hundred twenty (120) days following notice from the electing party to the other party (or such longer period as may be reasonably necessary for Borrower Parties to secure replacement financing as long as Borrower Parties are diligently pursuing said refinancing in good faith), without any Applicable Prepayment Fee due thereon so long as no Event of Default exists as of both the date Lender so accelerates or Borrower elects repayment of said Allocated Loan Amount and the date said Allocated Loan Amount is fully and finally repaid.

Section 3.4. Impounds.

(a) In connection with a permitted assumption or transfer of the Loan pursuant to Subsection 7.1(c), and in order to assure compliance with Borrower’s obligations pursuant to Section 7.2, but not in lieu of such obligations, Borrower (or its permitted successor) shall deposit with Lender, monthly on each Payment Date (commencing on the first Payment Date following Lender’s written request), one-twelfth (1/12th) of the annual charges for Taxes (collectively, “Impounds”). Each deposit shall be in an amount reasonably determined b y Lender that will be sufficient (when combined with other monthly installments) to make full payment of all Impounds thirty (30) days prior to the date any delinquency or penalty becomes due with respect to such Impounds. Deposits shall be made on the basis of the Impounds which have been fixed for the then current year; provided, however, that prior to the date that such Impounds have been so fixed, deposits shall be made on the basis of Lender’s reasonable estimate from time to time of the amount of Impounds for the then current year (after giving effect to any recalculation or reassessment or, at Lender’s election, on the basis of the Impounds for the prior year). All funds so deposited shall not be construed as trust funds, may be held by Lender, without interest, and may be commingled with Lender’s general funds. Borrower Pa rties (including any permitted successor to Borrower Parties) hereby grants to Lender a security interest in all Impounds so deposited with Lender for the purpose of securing the Obligations. Upon the occurrence of an Event of Default, all Impounds deposited with Lender may be applied in payment of the Impounds for which such funds have been deposited, or to the payment of the Obligations, as Lender

may elect, but no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender. Borrower’s permitted successor shall furnish Lender with bills for the Impounds at least thirty (30) days prior to the date on which such Impounds first become payable. If at any time Lender determines that the amount on deposit with Lender, together with the monthly installments to be deposited by Borrower’s permitted successor before the Impounds are payable, are insufficient to pay the Impounds, Borrower’s permitted successor shall deposit any deficiency with Lender within the Demand Period. Provided no Event of Default has occurred, Lender shall pay the Impounds when the amount on deposit with Lender is sufficient to pay such Impounds and Lender has received a bill for such Impounds.

(b) Borrower Parties acknowledges that Lender may, at any time Impounds are not being collected by Lender pursuant to Section 3.4(a) and at the sole cost and expense of Borrower, engage the services of a tax service company to verify the status of taxes and assessments on the Portfolio. Lender shall be entitled to rely upon (regardless of whether or not Lender engages a tax service company) any certificate, advice or bill from any authority (or any official thereof) to which such payments are payable, and Lender shall have no duty to inquire as to the validity or accuracy of any such certificate, advice or bill or to make any protest in connection therewi th.

(c) Nothing contained in this Section 3.4 shall be deemed to affect any right, power, privilege or remedy of Lender under any provision of this Agreement, the Mortgage, any other Loan Document or any statute or rule of law, to pay any amount required to be paid pursuant to Section 7.2, to add the amount so paid to the Obligations and to require Borrower to reimburse Lender for such amount, together with interest thereon at the Default Rate from the expiration of the Demand Period until payment in full is received by Lender. In the event of any transfer of Borrower’s right, title and interest in or to all or any part of the Portfolio (without implyin g any consent of Lender to any such transfer except as expressly set forth in this Agreement), Lender shall be entitled to treat such transfer as also effecting an assignment to the transferee of all right, title and interest of Borrower Parties in and to any and all such deposits relating to the transferred portion of the Portfolio. After any assignment by Lender of its interest in the Loan, any such deposits on hand shall, in Lender’s discretion, be turned over to the assignee or returned to Borrower Parties, and all further responsibility of Lender with respect to such deposits shall terminate.

ARTICLE 4.

0; LEASING MATTERS

Section 4.1. Representations and Warranties. Borrower represents and warrants to Lender that: (a) the rent roll delivered to Lender and attached hereto as Schedule 4.1 (the “Rent Roll”) is true, complete and correct in all material respects, and all Leases are valid and in and full force and effect; (b) all of the Leases (including amendments) are in writing, and there are no oral agreements with respect thereto; (c) the copies of the Leases delivered to Lender are true, complete and correct and include any and all amendments; (d) to Borrower’s knowledge, no Borrower Party as “landlord” nor any Tenant is in default in any material respect under any of the Leases; (e) Borrower has no knowledge of any notice of termination or “landlord” default issued by any Tenant with respect to any Lease, and Borrower has provided to Lender copies of all “tenant” default notices issued by or on behalf of an Individual Borrower in respect of uncured tenant defaults; (f) Borrower has not assigned or pledged any of the Leases, the Rents or any interests therein except to Lender; (g) except as set forth in the Rent Roll, no Tenant or other party has an option to purchase all or any portion of any Property; (h) except as set forth on the Rent Roll, no Tenant has the right to terminate its Lease prior to expiration of the stated term of such Lease; (i) no Tenant has prepaid more than one month’ s Rent in advance (except for bona fide security deposits as shown on the Rent Roll); and (j) other than amounts applied or returned in accordance with the Leases, the amount of all security deposits held by or on behalf of an Individual Borrower is the entire amount required to be deposited with or on behalf of an Individual Borrower pursuant to the Leases, and said deposits are held, to the extent required by applicable Legal Requirements, in separate and/or interest-bearing accounts. Within ten (10) days after Lender’s request, Borrower shall furnish to Lender a statement of all tenant security deposits held by or on behalf of an Individual Borrower, certified by an Authorized Representative of Borrower as being true, complete and correct.

Section 4.2. Lender’s Lease Approval Rights.

(a) Any Leases entered into by or on behalf of any Individual Borrower following the Funding Date that does not constitute a Major Lease shall be on a standard form approved by Lender (such approval not to be unreasonably withheld) with no material modifications (except as approved by Lender in writing, such approval not to be unreasonably withheld), prior to execution by or on behalf of any Individual Borrower.

(b) From and after the Funding Date, no Borrower Party nor any Person acting on behalf of a Borrower Party shall, without the prior written consent of Lender (such consent not to be unreasonably withheld): (i) enter into any Major Lease, (ii) enter into any amendment, modification, replacement, extension of, or renewal of any Major Lease (whether in existence as of the Funding Date or entered into after the Funding Date), other than extensions and/or renewals expressly contemplated by the terms of any approved Major Lease, (iii) enter into any amendment, modification, replacement, extension, or renewal of any non-Major Lease in a manner that would cause such non-Major Lease to become a Major Lease, (iv) consent to an assignment or subletting associated with any Major Lease, or (v) terminate or accept or acquiesce to the surrender of any Lease (regardless of whether said termination relates to a Major Lease or a non-Major Lease), other than a termination that is expressly provided for in such Lease; provided that Lender’s approval for the termination or surrender of a non-Major Lease shall not be required if following any such termination or surrender, the aggregate Portfolio occupancy continues to be at least eighty percent (80%) (“occupancy” means Tenants in occupancy, paying rent at the rates stipulated in their respective Leases and without any other economic or material non-economic default under such Leases). If any Individual Borrower intends to accept the termination or surrender of a non-Major Lease based on the immediately preceding exception, then concurrently with the effectiveness of said termination or surrender, the applicable Individual Borrower must provide Lender with a current rent roll and affidavit, in form reasonably required by Lender, confirming compliance with the conditions of said exception. Lender may condition its consent (when required) to any Lease termination on the deposit of any termination or surrender proceeds with Lender for distribution for costs associated with re-letting the subject space. In connection with any request for approval relating to a leasing matter, provided no Event of Default exists, Lender shall notify Borrower whether Lender has approved any such Lease or amendment, modification, replacement, extension, renewal, assignment, subletting, termination or surrender within ten (10) Business Days following Lender’s receipt of all information reasonably requested by Lender to review any such leasing approval request. 0; If Lender does not so notify Borrower within ten (10) Business Days following Lender’s receipt of all such information and if no Event of Default exists, Lender’s approval of such leasing matter shall be deemed granted.

Section 4.3. Covenants. Borrower shall (i) perform, observe, and comply with each of the covenants and agreements which any Individual Borrower is required to perform, observe or comply with under the Leases; (ii) use its commercially reasonable efforts to enforce the obligations to be performed by the Tenants under the Leases; (iii) promptly furnish to Lender any notice of default or termination received by a or on behalf of any Individual Borrower from any Tenant, and any notice of default or term ination given by or on behalf of any Individual Borrower to any Tenant; (iv) not collect any Rents for more than thirty (30) days in advance of the time when the same shall become due, except for bona fide security deposits (it being agreed by Borrower that Borrower shall give prompt written notice to Lender if Borrower collects any security deposit under any Lease equal to or in excess of an amount equal to three (3) month’s Rent under such Lease; (v) not enter into any ground lease or master lease of any part of the Portfolio; (vi) not further assign or encumber any Lease; (vii) hold in trust all payments and other monetary consideration received by or for the benefit of a Borrower Party in connection with any surrender or termination of any Lease and shall immediately deposit or cause to be deposited with Lender all such payments and other monetary consideration; and (viii) not, except as permitted in Section 4.2, enter into any new Lease or enter into or accept any extension, modification, terminat ion or renewal of any existing Lease, and any action in violation of clause (v), (vi), (vii), or (viii) of this Section 4.3 shall be void (as to all Borrower Parties ) at the election of Lender.

Section 4.4. Tenant Estoppels. Following the Funding Date, and within thirty (30) days following Lender’s reasonable request, Borrower shall obtain and furnish to Lender written estoppels in form and substance satisfactory to Lender, executed by the Tenants under all Leases and confirming the term, rent or daily rate, and other provisions and matters relating to the applicable Lease (provided that unless an Event of Default has occurred, Lender shall not make a request under this Section 4.4 w ith respect to any Lease not more than once during the term of the Loan).

Section 4.5. Conflict with Assignment of Leases and Rents. Any inconsistency between the terms of this Article 4 and the terms of the Assignment of Leases and Rents shall be controlled by the terms of the Assignment of Leases and Rents.

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES

As of the Funding Date, Borrower represents and warrants to Lender that:

Section 5.1. Organization and Power. Each Borrower Party is duly organized, validly existing and in good standing under the laws of the state of its formation or existence, and is in compliance with all Legal Requirements applicable to doing business in the State. No Borrower Party is a “foreign person” within the meaning of § 1445(f)(3) of the Internal Revenue Code.

Section 5.2. Validity of Loan Documents. The execution, delivery and performance by each Borrower Party (as applicable) of the Loan Documents (i) are duly authorized and do not require the consent or approval of any other party or Governmental Authority which has not been obtained (and copies of which have been provided to Lender); and (ii) will not violate any Legal Requirement or result in the imposition of any Lien upon the assets of any such party, except as contemplated by the Loan Documents.&# 160; The Loan Documents constitute the legal, valid and binding obligations of each Borrower Party (as applicable), enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, or similar laws generally affecting the enforcement of creditors’ rights.

Section 5.3. Liabilities; Litigation.

(a) The general financial and operating information relating to each Borrower Party and/or the Portfolio, submitted to Lender by or on behalf of any Borrower Party concurrently with or prior to the date of the Application, is true, complete and correct in all material respects with no significant change since the date of submission.

(b) No Borrower Party is contemplating either the filing of a petition by it under state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of its assets or property, and no Borrower Party has knowledge of any Person contemplating the filing of any such petition against any Borrower Party or any Property.

Section 5.4. Taxes and Assessments. Except for any Property that includes Excess Collateral as of the Funding Date, each Property constitutes a separate tax parcel, and no parcel forming part of the Portfolio is included within a tax parcel, for ad valorem or local real estate tax purposes, that also includes real property not encumbered by the Mortgage. There are no pending or, to the knowledge of Borrower Parties, any proposed special or other assessments for public improvements or othe rwise affecting any Property, nor are there any contemplated improvements to any Property that may result in such special or other assessments.

Section 5.5. Other Agreements; Defaults. No Borrower Party is a party to any agreement or instrument or subject to any court order, injunction, permit, or restriction which might adversely affect any Property or the business, operations, or condition (financial or otherwise) of any Borrower Party. No Borrower Party is in violation of any agreement which violation would have an adverse effect on any Property or any Borrower Party or the business, properties, or assets, operations or condit ion (financial or otherwise) of any Borrower Party.

Section 5.6. Compliance with Legal Requirements.

(a) Each Borrower Party has all requisite licenses, permits, franchises, qualifications, certificates of occupancy or other governmental authorizations to own, lease and operate each Property and carry on its business. The use being made of each Property is in conformity with the certificate of occupancy and/or applicable permits or governmental authorizations and any other restrictions, covenants or conditions affecting such Property.

(b) Each Property is in compliance with all applicable Legal Requirements (including building, parking, subdivision, land use, health, fire, safety and zoning ordinances and codes).

(d) No condemnation has been commenced or, to Borrower’s knowledge, is contemplated with respect to all or any portion of any Property or for the relocation of roadways providing access to any Property.

(e) Each Property has adequate rights of access to public ways, and all roads necessary for the full utilization of each Property for its current purpose have been completed and dedicated to public use and accepted by applicable Governmental Authorities.

(f) Except to the extent that any Property is adequately served by private systems and facilities located on such Property (and disclosed on the survey delivered to Lender on the Funding Date), each Property is served by adequate water, sewer, sanitary sewer and storm drain facilities, all public utilities necessary or convenient to the full use and enjoyment of such Property are located in the public right-of-way abutting such Property, and all such utilities are connected so as to serve such Property without passing over other property, except to the extent such other property is subject to a perpetual easement for such utility benefiting such Property.

(g) Borrower and, to the knowledge of Borrower, each other party bound under any declaration, reciprocal easement agreement, or other instrument of covenants, conditions and restrictions affecting any of the Properties are current in the payment of all sums that may be due thereunder and are otherwise in compliance in all material respects with the other provisions thereof.

Section 5.7. Location of Borrower. The principal place of business and chief executive offices of each Borrower Party are located at the addresses stated in Section 9.1.

Section 5.8. ERISA. No Borrower Party has established any pension plan for employees that would cause a Borrower Party to be subject to ERISA.

Section 5.9. Margin Stock. No part of proceeds of the Loan will be used for purchasing or acquiring any “margin stock” within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System.

Section 5.10. Tax Filings. Each Borrower Party has filed (or have obtained effective extensions for filing) all federal, state and local tax returns required to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by such Borrower Party, respectively.

Section 5.11. Solvency. The fair saleable value of each Borrower Parties’ assets exceeds and will, immediately following the funding of the Loan, exceed such Borrower Party’s total liabilities, including subordinated, unliquidated, disputed and contingent liabilities. The fair saleable value of each Borrower Parties’ assets are and will, immediately following the funding of the Loan, be greater than such Borrower Party’s probable liabilities, including the maximum amount of its contin gent liabilities on its Debts as such Debts become absolute and matured. Each Borrower Parties’ assets do not and, immediately following the funding of the Loan will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. No Borrower Party intends to, and does not believe that it will, incur Debts and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such Debts as they mature (taking into account the timing and amounts of cash to be received by such Borrower Party and the amounts to be payable on or in respect of obligations of such Borrower Party).

Section 5.12. Full and Accurate Disclosure. No statement of fact made by or on behalf of any Borrower Party in this Agreement or in any of the other Loan Documents contains any untrue statement of a material fact. There is no fact presently known to any Borrower Party which has not been disclosed to Lender that materially and adversely affects, or as far as any Borrower Party can reasonably predict, might materially and

adversely affect, any Property or the business, operations or condition (financial or otherwise) of any Borrower Party.

Section 5.13. Property Conditions. Each Property is free of material structural defects, and all building systems contained therein are in good working order in all material respects, subject to ordinary wear and tear.

Section 5.14. Terrorism and Anti-Money Laundering.

(a) As of the Funding Date, no direct or indirect holder of a beneficial interest in Borrower is an OFAC Prohibited Person.

(b) To comply with the Anti-Money Laundering Laws, all payments by a Borrower Party to Lender or from Lender to a Borrower Party shall only be made in the name of a Borrower Party and to and from a bank account of a bank based or incorporated in or formed under the laws of the United States or a bank that is not a “foreign shell bank” within the meaning of the U.S. Bank Secrecy Act (31 U.S.C. § 5311 et seq.), as amended, and the regulations promulgated thereunder by the U.S. Department of the Treasury, as such regulations may be amended from time to time.

(c) Each Borrower Party agrees to provide to Lender, or to cause any other Person having a beneficial interest in a Borrower Party, to provide, at any time and from time to time during the term of the Loan, such information as Lender determines to be necessary or appropriate to comply with the Anti-Money Laundering Laws of any applicable jurisdiction, or to respond to requests for information concerning the identity of any Borrower Party or any Person having a direct or indirect beneficial interest in any Borrower Party, from any Governmental Authority, self-regulatory organization or financial institution in connection with its anti-money laundering compliance proc edures, or to update such information.

(d) The representations and warranties set forth in this Section 5.14 shall be deemed repeated and reaffirmed by each Borrower Party as of each Payment Date and as of each date on which any Borrower Party receives any funds from Lender. Each Borrower Party agrees to promptly notify Lender in writing should it become aware of any change in the information set forth in this Section 5.14.

Section 5.15. Financing Transaction. The Loan is (or shall be) evidenced by debt instruments that are intended to be accounted for as “debt” on the balance sheet of each Borrower Party, and each Borrower Party shall account for the Loan as “debt” in all financial statements prepared by or on behalf of each Borrower Party.

Section 5.16. Personal Property. Except for the Personal Property listed on Schedule 5.16 attached hereto, no material tangible Personal Property is located within or outside any Property or used or proposed to be used in any Property. A Borrower Party has good title to all Personal Property free and clear of all Liens, except as disclosed on Schedule 5.16.

Section 5.17. Additional Real Property. Except for the Land (as defined in the Mortgage) and Improvements and any contiguous public streets and sidewalks, no Borrower Party nor any Property Manager uses or occupies any other material real property in connection with the operation, occupancy and management of any Property.

Section 5.18. Material Agreements.

(a) As of the Funding Date, each Property owned by an Individual Borrower is managed by Carveout Indemnitor in accordance with the partnership agreement for such Individual Borrower, and no separate management or leasing agreements currently exist. Management fees payable to Carveout Indemnitor shall not be modified to the extent that such modification would cause the management fees to exceed market rates payable to unrelated and qualified third party property managers and/or leasing agents.

(b) No Borrower Party other than Carveout Indemnitor has any right or claim to, or obligation to pay, any fees, commissions, royalties, compensation or other remuneration in connection with or arising out of the use, occupancy, management, and operation of any Property. Except as set forth in Schedule 5.18, there are no Material Agreements affecting any Property.

ARTICLE 6.

0; FINANCIAL REPORTING; AUDITS

Section 6.1. Financial Statements. While any of the Obligations remain outstanding, Borrower shall furnish to Lender, or in the case of the reporting under Subsection 6.1(e) below, Borrower shall cause Carveout Indemnitor to furnish to Lender, each of the following within the specified time period, each in hardcopy and electronic form, and each to be in format reasonably required by Lender:

(a) If requested by Lender, within thirty (30) days after the end of each calendar quarter (including the last calendar quarter of each year), a quarterly rent roll for each Property, certified to Lender by an Authorized Representative of Borrower as true, accurate and complete;

(b) Intentionally omitted;

(c) If requested by Lender, within thirty (30) days after the end of each calendar quarter (including the last calendar quarter of each year), quarterly operating statements for each Property, (including capital expenses), certified by an Authorized Representative of Borrower as true, accurate and complete;

(d) Within ninety (90) days following the end of each calendar year: (i) annual operating statements and a current rent roll for each Property, certified by an Authorized Representative of Borrower as true, accurate and complete, (ii) a fully-executed copy (certified by an Authorized Representative of Borrower as true, complete and correct) of any Lease executed by (or on behalf of) any Borrower Party during the preceding year that did not require Lender’s consent, and (iii) a capital expenditure summary for each Property for the preceding calendar year, certified by an Authorized Representative of Borrower as true, accurate and complete;

(e) Within ninety (90) days following the end of each calendar year, annual audited financial statements, including a balance sheet, for Carveout Indemnitor, certified by an Authorized Representative of Carveout Indemnitor as true, accurate and complete;

(f) If prepared by Borrower in the ordinary course of its business, within thirty (30) days following completion thereof by Borrower, final annual operating and capital expenditure budgets for each Property for the ensuing calendar year;

(g) Promptly following receipt, copies of all material notices (meaning written notices of violation of Legal Requirements or material notices to or from any Tenants, but excluding routine correspondence) issued or received in connection with the ownership and operation of any Property;

(h) Within sixty (60) days following the occurrence of any Permitted Transfer described in clause (a)(iii) of the definition of “Permitted Transfer” in Section 1.1, a certification, executed by an Authorized Representative of Carveout Indemnitor or any successor permitted under said clause (a)(iii) (as the case may be), confirming that immediately following such Permitted Transfer, Carveout Indemnitor or any such successor (as the case may be) was in compliance with the conditions and requirements set forth in said clause (a)(iii); and

(i) Promptly following Lender’s request, such other reasonable financial information relating to any Property or any Borrower Party as Lender may request in writing from time to time.

Section 6.2. Accounting Principles. All financial statements for the Carveout Indemnitor set forth above shall be prepared in accordance with GAAP, consistently applied, except for certain reclassifications allowed by GAAP or to comply with new GAAP accounting pronouncements. All operating statements for a Property shall

be prepared in accordance with GAAP, except rental income shall be prepared on an accrual basis, and not straight-lined.

ARTICLE 7.

0; COVENANTS

Borrower covenants and agrees with Lender as follows:

Section 7.1. Due on Sale and Encumbrance; Transfers of Interests.

(a) Without the prior written consent of Lender and except as expressly provided below:

(i) No Borrower Party nor any Person having an ownership or beneficial interest in a Borrower Party shall (A) consummate a Transfer, or (B) enter into any easement or other agreement granting rights in or restricting the use or development of the Collateral; and

(ii) No new partners shall be admitted to or created in a Borrower Party (nor shall any existing partner withdraw from a Borrower Party); and

(iii) No change in the day-to-day control and management of a Borrower Party, any Property or the Portfolio shall be implemented.

Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default in order to declare the Obligations to be immediately due and payable upon a Transfer in violation of this Agreement. This provision shall apply to every Transfer in violation of this Agreement regardless of whether such Transfer was voluntary or not, or whether or not Lender has previously consented to any Transfer.

(b) Notwithstanding the restrictions in Subsection 7.1(a), Permitted Transfers will be permitted without Lender’s prior consent. Carveout Indemnitor (or any successor permitted under clause (a)(iii) of the definition of “Permitted Transfer” in Section 1.1) shall at all times, whether prior to or following the occurrence of any Permitted Transfer, be the sole general partner of each Individual Borrower.

(c) Notwithstanding anything to the contrary set forth in this Agreement, Lender shall consent to a one-time transfer of title to the Portfolio and assumption of 100% of the Loan and the duties and obligations of Borrower and Carveout Indemnitor under the Loan Documents, subject to satisfaction of each and every one of the following conditions:

(i) At least thirty (30) days prior to such assumption, Borrower Parties shall provide to Lender: (A) written notice (a “Assumption Request”) of the proposed transfer, (B) a work fee in the amount of $25,000.00 (the “Assumption Work Fee”), (C) the name(s), address(es) and organizational documents of the proposed purchaser and of the principals, affiliates and parent or other majority owners, as applicable, of the proposed purchaser, (D) detailed and complete financial statements of the proposed purchaser and of the principals, affi liates and parent or other majority owners, as applicable, of the proposed purchaser, (E) information with respect to the business and business experience of the proposed purchaser and its principals, affiliates and parent or other majority owners, as applicable, and their experience in the ownership and operation of properties similar to the Portfolio and other commercial real estate, (F) information on the proposed property management company and a copy of the proposed property management agreement, (G) the terms and conditions of the proposed sale and a copy of the executed purchase and sale agreement, (H) a description of the ownership structure of the proposed purchaser and each of its principals, affiliates and parent or other majority owners, as applicable, (I) the purchaser’s pro-forma operating and management plan for the Portfolio, and (J) promptly following Lender’s request, such other information as Lender may reasonably request to permit it to determine the creditworthiness and manag ement abilities of the proposed purchaser and its principals, affiliates and parent or other majority owners, as applicable;

(ii) Lender must approve, in the exercise of its discretion, the identity, creditworthiness, management abilities and all other attributes of the proposed purchaser and the proposed replacement Carveout Indemnitor(s), and their respective principals, affiliates and parent or other majority owners, as applicable;

(iii) No Event of Default shall have occurred and be continuing, either as of the date of the Assumption Request or thereafter through the date of transfer of title to the Portfolio and assumption of the Loan;

(iv) The Portfolio, as of the date of transfer and assumption and thereafter, must be managed by a management company approved by Lender (in the exercise of its reasonable judgment) under a management agreement satisfactory to Lender (in the exercise of its reasonable judgment) and otherwise satisfying the requirements of Section 7.10;

(v) At the closing of any approved transfer and assumption, the proposed purchaser shall assume the duties and obligations of Borrower Parties under the Loan Documents (subject to the limitations on liability set forth in Article 10) pursuant to assumption documents in form and substance satisfactory to Lender (in the exercise of its reasonable judgment). Additionally, at the time of the approved transfer and assumption, the proposed purchaser shall provide to Lender an environmental indemnity agreement from said purchaser and from another financially responsible Person acceptable to Lender (in its discretion) in form and substance reasonably satisfactor y to Lender (which form may be different from the form executed by Borrower Parties as a result of Lender’s updating its standard form of environmental indemnity agreement or as a result of specific environmental conditions at any Property) and a recourse carveout indemnity in substantially the same form as the Carveout Indemnity, also from a financially responsible Person acceptable to Lender (in its discretion). Borrower Parties and the proposed purchaser and such other Persons as Lender shall require shall also deliver and, if applicable, execute (A) evidence of authority and entity existence, (B) Uniform Commercial Code, judgment and bankruptcy searches, (C) Uniform Commercial Code financing statements, (D) an endorsement to the Title Policy updating the effective date to the date of the transfer, showing the purchaser as the owner of each Property, showing no additional title exceptions, except as shall be approved by Lender (in its discretion) and otherwise in form and substance reason ably acceptable to Lender, (E) opinions of counsel reasonably acceptable to Lender on such matters as Lender shall reasonably require, (F) evidence of insurance as required by Section 3.1, and (G) such other documents as Lender shall reasonably require in order to effectuate the transaction as contemplated by this Subsection (c);

(vi) At the closing of any approved transfer and assumption, the proposed purchaser shall, in accordance with the terms and conditions of Sections 3.4, deposit with Lender sufficient funds to pay when due all Impounds in accordance with the terms of Section 3.4. To the extent the Loan Documents require any other reserves or deposits the same shall be established by the proposed purchaser prior to the date of closing of the approved transfer and assumption. The foregoing requirement for deposits and reserves shall be enforced notwithstanding that any of the foregoing may have been waived by Lender with respect to Borrower Parties either in this Agreement, or in any side letter or agreement executed by Lender;

(vii) At the closing of any approved transfer and assumption, Borrower shall pay to Lender a fee in the amount of one percent (1%) of the then outstanding balance of the Loan in immediately available funds (the “Assumption Fee”). The obligation to pay the Assumption Fee is consideration to induce Lender to allow the proposed purchaser to assume the obligations of Borrower Parties’ under the Loan Documents and to release Borrower Parties from liability thereunder for all periods of time from and after the date of transfer in accordance with this Subsection (c); provided that in no event shall any Borrower Party be released from any liability accruing prior to the date of the transfer of the Portfolio pursuant to this Subsection (c), including acts or omissions leading to a violation of Environmental Laws (as defined in the Environmental Indemnity Agreement), whether known or unknown as of the closing of the approved transfer;

(viii) The proposed transfer and assumption shall not cause a violation of any Legal Requirements governing any Property, the Loan, Borrower Parties, the proposed purchaser, any proposed replacement carveout indemnitor or any of their respective principals;

(ix) Lender must confirm, in the exercise of its reasonable judgment, that as of the date of the proposed transfer of the Portfolio and assumption of the Loan, the Portfolio will generate (A) the lesser of (1) a Loan to Value Ratio of not more than sixty-five percent (65%), and (2) a Loan to Cost Ratio of not more than sixty-five percent (65%); and (B) a Debt Service Coverage Ratio of at least 125%, calculated for the 12-month period immediately following the proposed transfer of the Portfolio and assumption of the Loan (based on a fully amortizing 20-year schedule). As used herein, “Loan to Value Ra tio” means the ratio of (A) the outstanding balance of the Loan, compared to (B) the aggregate of the then “as is” value of the Portfolio, all as determined by Lender in the exercise of its reasonable judgment. As used herein, “Loan to Cost Ratio” means the ratio of (A) the outstanding balance of the Loan, compared to (B) the aggregate of the purchase price and other reasonable and customary closing costs, as approved by Lender in its discretion, paid by the proposed purchaser to acquire the Portfolio;

(x) On the earlier of ten (10) days following demand by Lender or the closing of the approved transfer and assumption, Borrower Parties shall pay all of Lender’s reasonable costs and expenses incurred in connection with the proposed transfer of the Portfolio whether or not the transfer actually occurs, including attorneys’ fees, recording and filing charges, title company charges and the cost of the endorsement to the Title Policy. The Assumption Work Fee shall be applied to reimburse Lender for its costs and expenses (with any excess after full payment of all of Lender’s costs and expenses being applied to the Assumption Fee or returne d to Borrower Parties), but the Assumption Work Fee shall not be deemed to be a cap or limitation on the obligation of Borrower to reimburse Lender for all costs and expenses incurred by Lender under this Subsection (c), regardless of whether such amounts exceed the Assumption Work Fee and/or Lender, in the exercise of its judgment, does not approve the proposed purchaser, any proposed replacement guarantor or any other aspect of the proposed transfer; and

(xi) Lender shall have no obligation to review or process the request of Borrower Parties for approval of a proposed transfer of the Portfolio and assumption of the Loan until such time as Lender has received all of the items, including the Assumption Work Fee, required to be delivered to Lender pursuant to this Subsection (c).

(d) Notwithstanding the restrictions in Subsection 7.1(a), Lender shall not withhold its consent to any pledge by Carveout Indemnitor of the general partnership interests in Borrower in order to secure so-called “mezzanine” financing subject to satisfaction (to be determined by Lender in the exercise of its reasonable judgment) of each and every one of the following conditions:

(i) No Event of Default shall have occurred and be continuing, either as of the date of the request for Lender’s consent or thereafter through the date of the closing of such pledge and the proposed mezzanine financing;

(ii) Lender must confirm (in the exercise of its reasonable discretion) that following the closing of such pledge and the proposed mezzanine financing, Carveout Indemnitor shall have a Tangible Net Worth of not less than $100,000,000;

(iii) Each Borrower Party must deliver all information reasonably requested by Lender with respect to such pledge and the proposed mezzanine financing;

(iv) Prior to Lender’s consent under this Subsection 7.1(d) becoming effective, Borrower must reimburse Lender for all reasonable costs and expenses incurred by Lender in connection with the mezzanine financing, including legal fees and expenses; and

(v) At all times following the closing of such pledge and the proposed mezzanine financing, Carveout Indemnitor shall remain the sole general partner of each Individual Borrower and shall continue

to control the exercise of all rights, powers and privileges afforded to Carveout Indemnitor in its capacity as general partner under the applicable partnership agreements and other organizational documents and applicable laws, and no pledgee of Carveout Indemnitor’s general partnership interests in any Individual Borrower may take title to such general partnership interests or exercise any of the rights, powers and privileges afforded to Carveout Indemnitor in its capacity as general partner.

(e) The prohibitions and restrictions set forth in this Article 7 shall not preclude: (i) any Borrower Party from granting liens that encumber real property other than the Collateral, or (ii) Carveout Indemnitor from providing indemnities or guaranties in favor of creditors other than Lender; it being agreed such actions may be effected without Lender’s consent.

Section 7.2. Taxes; Charges.

(a) Subject to the terms of Section 3.4, Borrower shall pay before any fine, penalty, interest or cost may be added thereto, and shall not enter into any agreement to defer, any Taxes. Borrower shall not suffer or permit the joint assessment of any Property with any other real or personal property not encumbered by the Mortgage.

(b) Borrower shall pay when due all claims and demands of mechanics, material suppliers, laborers and others which, if unpaid, might result in a Lien on any Property; provided, however, that Borrower Parties may contest the validity of such claims and demands so long as (i) the applicable Individual Borrower notifies Lender that it intends to contest such claim or demand, (ii) Borrower Parties provide Lender with an indemnity, bond or other security satisfactory to Lender (including an endorsement to the Title Policy insuring against such claim or demand) assuring the discharge of the obligations of the applicable Individual Borrower for such claims and demands, including interest and penalties, and (iii) the applicable Individual Borrower is diligently contesting the same by appropriate legal proceedings in good faith and at its own expense and concludes such contest prior to the tenth (10th) day preceding the earlier to occur of the Scheduled Maturity Date or the date on which such Property is scheduled to be sold for non-payment.

Section 7.3. Alterations and Renovations. Borrower Parties shall obtain Lender’s prior written consent (such consent not to be unreasonably withheld) to any alterations or renovations to any of the Improvements; provided, however, that Lender’s consent shall not be required in connection with any alterations or renovations that (i) are contemplated in connection with any Restoration, (ii) are permitted to be made b y any Tenant under its Lease without the consent or approval of any Borrower Party, or (iii) will not have a material adverse effect on the financial condition of any Borrower Party, the value of the affected Property or the Net Operating Income of the affected Property, provided further that such alterations permitted under subsection (iii) do not adversely affect any structural component of any Improvements relating to the affected Property, any utility or HVAC system contained in any Improvements relating to the affected Property, or the exterior of any building constituting a part of any Improvements of the affected Property, and the aggregate cost thereof does not exceed the lesser of either: (A) ten percent (10%) of the Allocated Loan Amount of the affected Property, or (B) One Million Dollars ($1,000,000.00). In connection with any request for approval relating to any alterations or renovations to any of the Improvements, prov ided no Event of Default exists, Lender shall notify Borrower whether Lender has approved any such request within ten (10) Business Days following Lender’s receipt of all information reasonably requested by Lender to review any such request. If Lender does not so notify Borrower within ten (10) Business Days following Lender’s receipt of all such information and if no Event of Default exists, Lender’s approval of such request shall be deemed granted.

Section 7.4. Operation; Maintenance.

(a) Borrower shall not cause or permit any waste of any material portion of any Property.

(b) Borrower shall observe and comply with all Legal Requirements applicable to the ownership, use and operation of each Property and shall promptly commence a reasonable and good faith cure of any alleged violation of any Legal Requirements; provided that the applicable Individual Borrower may, upon providing Lender with security satisfactory to Lender (in the exercise of Lender’s reasonable judgment) and so long as during any contest the Collateral shall not be subject to any lien, charge, fine or other liability and shall not be in danger of

being forfeited, lost or closed, proceed diligently and in good faith to contest the validity or applicability of any such alleged violation of Legal Requirement.

(c) Borrower shall maintain each Property in good condition and promptly repair any damage or casualty (subject to the terms of this Agreement).

(d) Upon reasonable prior notice (except during the existence of an Event of Default, when no prior notice shall be required), Borrower Parties and any Property Manager (if any) shall provide Lender and its agents, representatives and contractors with access to each Property from time to time (subject to the rights of Tenants) for the purposes of conducting appraisals, engineering inspections and environmental assessments of such Property (provided that Lender must have a good faith belief that an Individual Borrower is not in material compliance with its warranties, covenants and agreements relating to physical condition of the subject Property and/or complia nce with Legal Requirements (including Environmental Laws, as defined in the Environmental Indemnity Agreement) prior to the commencement of any post-Funding Date engineering inspection or environmental assessment or investigation with respect to that Property) and with access to Borrower’s home office for purposes of examining and copying the books and records relating to the Portfolio. The costs relating to such activities shall be paid by Lender unless (i) Lender has a good faith basis for suspecting that an Individual Borrower is not in material compliance with its warranties, covenants and agreements relating to the physical condition of the subject Property and/or compliance with laws (including environmental laws), (ii) the examination of such books and records reveals that financial information submitted to Lender by Borrower Parties, Property Manager or anyone on behalf of Borrower Parties is materially inaccurate, or (iii) an Event of Default exists (or is discovered as a result of any such inspection or review), in which case the reasonable third party fees and expenses relating to such activities shall be paid by Borrower within the Demand Period.

(e) All Operating Revenues shall be applied to Operating Expenses, Debt Service and reasonable and necessary capital expenditures or costs, and then, provided no Event of Default exists, to general operating purposes of Borrower, including distributions to members and/or partners of Borrower.

Section 7.5. Taxes on Security. Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies payable with respect to the Note or the Liens created or secured by the Loan Documents, other than income, franchise and doing business taxes imposed on Lender. If there shall be enacted any law (a) deducting the Loan from the value of the Collateral for the purpose of taxation, (b) affecting any Lien on any Property, or (c) changing existing laws of taxation of mortgages, deeds of trust, security deeds, or debts secured by real property, or changing the manner of collecting any such taxes, Borrower shall promptly pay to Lender, within thirty (30) days following demand, all taxes, costs and charges for which Lender is or may be liable as a result thereof; provided, however, that if any such payment would be prohibited by law or would render the Loan usurious, then instead of collecting such payment, Lender may declare all amounts owing under the Loan Documents to be immediately due and payable (provided that Borrower shall have no obligation to make payment of any Applicable Prepayment Fee otherwise applicable to prepayment tendered as a result of Lender’s exercise of its rights under this Section 7.5).

Section 7.6. Compliance with Loan Documents; Further Assurances.

(a) Each Borrower Party shall observe, perform and satisfy in a timely manner all the terms, provisions, covenants, conditions, duties and obligations required to be observed, performed or satisfied by them, and shall pay when due all costs, fees and expenses required to be paid by them, under and pursuant to this Agreement, the Note and the other Loan Documents.

(b) Each Borrower Party shall promptly (i) cure, or cause to be cured, any defects in the execution and delivery of the Loan Documents, and (ii) execute and deliver, or cause to be executed and delivered, all such other documents, agreements and instruments as Lender may reasonably request to further evidence and more fully describe the collateral for the Obligations, to correct any omissions or errors in the Loan Documents, to perfect, protect or preserve any Liens created under any of the Loan Documents, or to make any recordings, file any notices, or obtain any consents, as may be necessary or appropriate in connection therewith.

(c) No Borrower Party shall (i) change the location of its chief executive office/chief place of business from that specified in Section 9.1, or (ii) change its name, or (iii) change the location where it maintains its records with respect to the Portfolio, unless in each instance Borrower Parties shall have given Lender at least thirty (30) days prior written notice of any such change and shall have delivered to Lender all UCC financing statements and amendments thereto as Lender shall request and taken all other actions deemed necessary by Lender to continue its perfected first priority lien status in the Collateral.

Section 7.7. Estoppel Certificates. Borrower Parties, within twenty (20) days after request, shall furnish to Lender a written statement, duly acknowledged by an Authorized Representative of Borrower Parties, setting forth the amount due on the Loan, the terms of repayment of the Loan, the date to which interest has been paid, whether any offsets or defenses exist against the Loan and, if any are alleged to exist, the nature thereof in detail, and such other reasonable matters as Lender may request.

Section 7.8. Notice of Certain Events. Borrower Parties shall, within three (3) Business Days after gaining knowledge, notify Lender of (i) any Event of Default, together with a detailed statement of the steps being taken to cure such Event of Default (Lender having no obligation to accept any such cure of an Event of Default unless acceptance of a cure and reinstatement is mandatory under applicable law); (ii) any notice of any material default received by Borrower Parties under other obligations r elating to any Property or otherwise material to Borrower’s business; and (iii) any threatened or pending legal, judicial or regulatory proceedings, including any dispute between a Borrower Party and any Governmental Authority, affecting a Borrower Party or any Property.

Section 7.9. Indemnification. Borrower shall jointly and severally indemnify, defend and hold Lender harmless from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever, including the reasonable fees and actual expenses of Lender’s attorneys, in connection with (i) any inspection, review or testing of or with respect to any Property, (ii) any investigative, administrativ e, mediation, arbitration, or judicial proceeding, whether or not Lender is designated a party thereto, commenced or threatened at any time (including after the repayment of the Loan) in any way related to the execution, delivery or performance of any Loan Document or to any Property, (iii) any proceeding instituted by any Person claiming a Lien, and (iv) any brokerage commissions or finder’s fees claimed by any broker or other party in connection with the Loan, any Property, or any of the transactions contemplated in the Loan Documents, including those arising from the joint, concurrent, or comparative negligence of Lender, except to the extent any of the foregoing is caused by Lender’s gross negligence or willful misconduct.

Section 7.10. Property Management.

(a) Each Property has been, and as of the Funding Date will be, managed by Carveout Indemnitor. If at any time any Individual Borrower wishes to engage a third-party property manager (including any Affiliate of Borrower) to manage the applicable Property, Borrower must request and receive Lender’s approval of such proposed property manager and the proposed management agreement (Lender’s approval not to be unreasonably withheld) prior to engaging such proposed property manager. Lender may condition its approval of a proposed property manager and management agreement on such Individual Borrower’s and such proposed property manag er’s execution and delivery of an assignment of management agreement and subordination of management fees in form and substance acceptable to Lender whereby, among other things, the proposed property manager agrees to subordinate payment of its management fees to the full and timely payment of the Obligations, and such Individual Borrower assigns to Lender all of Borrower’s rights under the proposed management agreement.

(b) Borrower Parties shall (i) diligently perform and observe all of the terms, covenants and conditions of any Management Agreement on the part of Borrower Parties to be performed and observed and do all things necessary to preserve and to keep unimpaired its rights thereunder, and (ii) within three (3) Business Days following receipt, notify Lender of the giving of any notice by any Property Manager to Borrower Parties of any default by a Borrower Party in the performance or observance of any of the terms, covenants or conditions of any Management Agreement on the part of a Borrower Party to be performed and observed and deliver to Lender a true copy of each such notice.

(c) Without the prior written consent of Lender (such consent not to be unreasonably withheld if no Event of Default exists), no Borrower Party shall (i) surrender any Management Agreement, (ii) consent to the

assignment by the Property Manager of its rights, duties or obligations under any Management Agreement, (iii) terminate or cancel any Management Agreement, or (iv) modify, change, supplement, alter or amend any Management Agreement, either orally or in writing.

(d) Any change in ownership or control of any Property Manager shall be cause for Lender to re-approve such Property Manager and the applicable Management Agreement (such approval not to be unreasonably withheld if no Event of Default exists).

(e) Borrower hereby assigns to Lender all the rights, privileges and prerogatives of Borrower in and under any Management Agreement (including the right to surrender any Management Agreement or to terminate, cancel, modify, change, supplement, alter or amend any Management Agreement in any respect, and any such surrender of any Management Agreement or termination, cancellation, modification, change, supplement, alteration or amendment of any Management Agreement without the prior consent of Lender shall be void and of no force and effect).

(f) Upon the occurrence of an Event of Default, Lender may require, upon ten (10) Business Days prior written notice to Borrower, that Borrower select a Property Manager not affiliated with Borrower to manage each Property. If a Property Manager is so required by Lender, Borrower shall immediately seek to appoint a Property Manager acceptable to Lender (in the exercise of its reasonable discretion), which Property Manager shall (i) be a reputable management company having at least ten (10) years’ experience in the management of properties substantially similar to each Property and in the jurisdiction in which each Property is located, (ii) not be paid management fees in excess of market fees, (iii) enter into a property management agreement in form and content acceptable to Lender (such approval not to be unreasonably withheld), and (iv) enter into a subordination agreement with Lender in form and content reasonably required by Lender.

Section 7.11. Material Agreements. Borrower shall not enter into or become obligated under, or permit Property Manager to enter into or become obligated under, any Material Agreement pertaining to any Property, without the prior written consent of Lender, which consent shall not be unreasonably withheld.

Section 7.12. Intentionally Omitted.

Section 7.13. ERISA.

(a) No Borrower Party shall engage in any transaction that would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Agreement or the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under ERISA.

(b) Borrower Parties shall deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as requested by Lender, that (i) no Borrower Party is an “employee benefit plan” as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (ii) no Borrower Party is subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans; and (iii) one or more of the following circumstances is true:

(i) Equity interests in each Borrower Party are publicly offered securities, within the meaning of 29 C.F.R. §2510.3-101(b)(2);

(ii) Less than twenty-five percent (25%) of each outstanding class of equity interests in each Borrower Party is held by “benefit plan investors” within the meaning of 29 C.F.R. §2510.3-101(f)(2); or

(iii) Each Borrower Party qualifies as an “operating company” or a “real estate operating company” within the meaning of 29 C.F.R. §2510.3-101(c) or (e).

Section 7.14. Appraisal. Borrower Parties shall cooperate with Lender’s request for reasonable information necessary to complete a new or updated appraisal of each Property, and Borrower Parties shall reimburse Lender for all costs associated with a new or updated appraisal of such Property; provided that so long as no Event of Default has occurred, Borrower Parties shall only be obligated to reimburse Lender for one (1) new or updated appraisal for each Property afte r the Funding Date (the reimbursement obligations of Borrower Parties being unlimited following the occurrence of an Event of Default).

Section 7.15. Release of Collateral.

(a) Subject to the terms and conditions of this Section 7.15, Lender agrees to execute and deliver to Borrower in connection with the sale or transfer by any Individual Borrower of any Property a partial release instrument (in recordable form) of the lien of the Mortgage and the other Loan Documents as to such Property (each, a “Partial Release”), provided that in connection with each such Partial Release, each and every one of the following conditions are satisfied (to be determined by Lender in the exercise of its reasonable judgment ):

(i) As of the date Lender issues such Partial Release, no monetary Potential Default (which solely for the purposes of this provisions means a failure to make a payment of a liquidated sum of money on the due date thereof but for which the applicable grace period has yet to expire) then exists, and no Event of Default shall exist;

(ii) Borrower shall have submitted a written request for such Partial Release no less than thirty (30) days prior to the anticipated issuance thereof, such request identifying the Property subject to such requested Partial Release and containing all other information required hereunder;

(iii) Borrower shall not be entitled to request, and Lender shall have no obligation to issue: (A) a Partial Release prior to October 1, 2009, and (B) Partial Releases for more than two (2) Properties in any 12-month period;

(iv) Borrower shall not be entitled to request, and Lender shall have no obligation to issue a Partial Release for any Property, if such Property, together with all Properties previously released pursuant to this Section 7.15, contains, in the aggregate, more than: (A) 807,000 square feet, if the San Ignacio Properties shall have been previously released pursuant to this Section 7.15 or substituted pursuant to Section 7.16; or (B) 600,000, if the San Ignacio Properties shall remain in the Portfolio;

(v) Concurrently with its delivery of a Partial Release, Lender shall receive a partial release prepayment (each a “Partial Release Prepayment”) in an amount equal to: (A) one hundred twenty percent (120%) of the Allocated Loan Amount for the applicable Property and (B) the Applicable Prepayment Fee (if any) relating to such Partial Release Prepayment, such amount to be applied by Lender in satisfaction of the Obligations (including any such Applicable Prepayment Fee);

(vi) Lender shall have confirmed, in the exercise of its reasonable judgment, that the remaining Properties within the Portfolio shall, following the issuance of such Partial Release, generate a Debt Service Coverage Ratio, calculated for the 12-month period immediately following the issuance of the requested Partial Release (based on a fully amortizing 20-year schedule), equal to or in excess of the greater of: (A) 125%, or (B) the Debt Service Coverage Ratio for all Properties (inclusive of the Property subject to the requested Partial Release and without giving effect to the Partial Release Prepayment to be made for the requested Partial Release) calculated for the 12-month period immediately preceding the issuance of the requested Partial Release;

(vii) Lender shall have confirmed in the exercise of its reasonable judgment, that the Loan to Value Ratio, calculated after giving effect to the issuance of the requested Partial Release and application of the Partial Release Prepayment to be made for such requested Partial Release, shall not exceed the lesser of (1) 65%, or (2) the Loan to Value Ratio calculated immediately prior to giving effect to the issuance of such Partial Release and application of the Partial Release Prepayment to be made for such Partial Release. As used herein, “Loan to Value Ratio” means the ratio of (A) the then outstanding balance of the Loan,

compared to (B) the aggregate of the then “as is” value of the Portfolio, all as determined by Lender in the exercise of its reasonable judgment;

(viii) Concurrently with Lender’s execution and delivery of each Partial Release, Lender must receive a partial release fee of $2,500.00 together with payment of all reasonable costs and expenses incurred by Lender in connection with such Partial Release, including reasonable outside counsel attorneys’ fees and expenses; and

(ix) Lender shall have confirmed in the exercise of its reasonable judgment, that no Property remaining within the Portfolio will, following the issuance of the requested Partial Release, be adversely affected by such partial release because such remaining Property relied on the Property to be released for compliance with all Legal Requirements (including zoning, subdivision, shared parking, utilities, and/or access).

(b) Upon approval of a requested Partial Release and satisfaction of the terms and conditions specified in this Section 7.15, Lender shall execute and deliver to Borrower Parties the Partial Release.

Section 7.16. Substitution of Collateral.

(a) Subject to the terms and conditions of this Section 7.16, Lender agrees to accept the substitution of collateral for a Property (each, a “Collateral Substitution”), provided that in connection with each Collateral Substitution, each and every one of the following conditions are satisfied (to be determined by Lender in the exercise of its reasonable judgment):

(i) As of the date Lender consents to the Collateral Substitution and as of the date the Collateral Substitution is deemed effective, no monetary Potential Default (which solely for the purposes of this provisions means a failure to make a payment of a liquidated sum of money on the due date thereof but for which the applicable grace period has yet to expire) then exists, and no Event of Default shall exist;

(ii) Borrower shall not be entitled to request, and Lender shall have no obligation to approve: (A) a Collateral Substitution prior to October 1, 2009 or after October 1, 2017, and (B) Collateral Substitutions for more than two (2) Properties in any 12-month period;

(iii) Only Borrower, and not a permitted successor under Section 7.1(c), shall have the right to request a Collateral Substitution;

(iv) Borrower shall not be entitled to request, and Lender shall have no obligation to approve a Collateral Substitution for any Property, if such Property, together with all Properties previously substituted pursuant to this Section 7.16, contains, in the aggregate, more than: (A) 807,000 square feet, if the San Ignacio Properties shall have been previously released pursuant to Section 7.15 or substituted pursuant to this Section 7.16; or (B) 600,000, if the San Ignacio Properties shall remain a portion of the Portfolio;

(v) Lender shall have confirmed, in the exercise of its reasonable judgment, that the Portfolio will, following the closing of such Collateral Substitution, generate a Debt Service Coverage Ratio, calculated for the 12-month period immediately following the closing of the requested Collateral Substitution (based on a fully amortizing 20-year schedule), equal to or in excess of the greater of: (A) 125%, or (B) the Debt Service Coverage Ratio (inclusive of the Property to be released from the Portfolio and exclusive of the Substitute Property to be added to the Portfolio in connection with the requested Collateral Substitution) calculated for the 12-month period immediately preceding the closing of the reques ted Collateral Substitution;

(vi) Lender shall have confirmed in the exercise of its reasonable judgment, that the Loan to Value Ratio, calculated after giving effect to the closing of the Collateral Substitution, will not exceed the lesser of (1) 65%, or (2) the Loan to Value Ratio calculated immediately prior to giving effect to the

closing of the Collateral Substitution. As used herein, “Loan to Value Ratio” means the ratio of (A) the then outstanding balance of the Loan, compared to (B) theaggregate of the then “as is” value of the Portfolio, all as determined by Lender in the exercise of its reasonable judgment;

(vii) Borrower Parties shall have submitted a written request for the Collateral Substitution no less than sixty (60) days prior to the anticipated consummation thereof, such request identifying the Property subject to the requested Collateral Substitution and the proposed substitute collateral therefor, and containing all other information reasonably requested by Lender in connection with its consideration of the request for the Collateral Substitution (said sixty (60) day review period commencing when Lender receives all information reasonably requested by Lender). At the time of submission of such written request, Borrower Parties shall provide to Lender a work fee in the amount of $25,000.00 (the “ Substitution Work Fee”);

(viii) Borrower Parties must provide the same scope and quality of due diligence materials in connection with Lender’s consideration of the proposed Substitute Property as provided in connection with Lender’s underwriting and due diligence associated with the applicable Property for which substitute collateral is being provided (including title, survey, property condition, environmental and seismic reports, evidence of zoning compliance, evidence of insurance and tenant estoppels) and any additional materials then required as a result of changes to Lender’s standard underwriting or due diligence processes;

(ix) Lender must approve, in the exercise of its reasonable discretion, all aspects of the proposed substitute collateral (the “Substitute Property”), including such factors as value, age, cash flow, quality, property condition, location, tenancy and other factors then included in Lender’s underwriting criteria;

(x) If requested by Lender in its reasonable discretion as a condition to its approval of any Substitute Property, Lender and Borrower shall have amended and restated the Allocated Loan Amounts for the Substitute Property and each remaining Property within the Portfolio;

(xi) If approved, Lender shall receive a collateral substitution fee in an amount equal to $25,000.00, payable concurrently with the consummation of the Collateral Substitution; and

(xii) Lender shall have confirmed in the exercise of its reasonable judgment, that no Property remaining within the Portfolio will, following the consummation of the Collateral Substitution, be adversely affected by such Collateral Substitution because such remaining Property relied on the Property to be released for compliance with all Legal Requirements (including zoning, subdivision, shared parking, utilities, and/or access).

(b) Borrower agrees to pay or reimburse Lender for all reasonable costs and expenses incurred by Lender in connection with the proposed Collateral Substitution, including reasonable outside counsel fees and expenses, regardless of whether the Collateral Substitution is approved by Lender. Payment of costs and expenses must be tendered upon the earlier of consummation of the Collateral Substitution or within the Demand Period. The Substitution Work Fee shall be applied to reimburse Lender for its costs and expenses (with any excess after full payment of all of Lender’s costs and expenses being applied to the collateral substitution fee of $25,000 or returned to Borrower Parties), but the Substitution Work Fee shall not be deemed to be a cap or limitation on the obligation of Borrower to reimburse Lender for all costs and expenses incurred by Lender under this Section 7.16, regardless of whether such amounts exceed the Substitution Work Fee and/or Lender, in the exercise of its judgment, does not approve the requested Collateral Substitution.

(c) If a proposed Collateral Substitution is approved by Lender, Borrower Parties shall, at their sole cost, execute and/or deliver: (i) all documents reasonably required by Lender, which documentation shall be in form comparable to the Loan Documents executed as of the date hereof and which shall include a modification and/or reaffirmation agreement covering the existing Loan Documents, a mortgage, deed of trust or other customary security instrument, an assignment of leases and rents, an assignment of property documents, an assignment of management agreement and subordination of management fees, an environmental indemnity agreement, a closing affidavit and Uniform Commercial Code financing statements; (ii) an ALTA (or equivalent) mortgagee title policy

for the Substitute Property, such title policy to be in form and substance satisfactory to Lender in its reasonable discretion; (iii) evidence of authority and entity existence; (iv) Uniform Commercial Code, judgment and bankruptcy searches; (v) opinions of counsel reasonably acceptable to Lender on such matters as Lender shall reasonably require; (vi) evidence of insurance as required by Section 3.1 for the Substitute Property; and (vii) such other documents or items as Lender shall reasonably require in order to effectuate the Collateral Substitution.

(d) Upon approval of the proposed Collateral Substitution and satisfaction of the terms and conditions specified in this Section 7.16, Lender shall execute and deliver to Borrower Parties a partial release (in recordable form) of the lien of the Mortgage and the other Loan Documents with respect to the Property for which substitute collateral is being provided. Following the consummation of the Collateral Substitution, the Substitute Property shall be considered and deemed to be a “Property” and included within the “Portfolio&# 8221; for all purposes under this Agreement and the other Loan Documents.

Section 7.17. Excess Collateral.

(a) Lender acknowledges that, as a result of Borrower’s inability to complete certain parcel splits in accordance with applicable Legal Requirements prior to the Funding Date, certain portions of certain Properties (as more particularly described on Schedule 2, collectively, the “Excess Collateral”) include Land and Improvements and other Collateral which is encumbered by the lien of the Mortgage and the other Loan Documents solely because such Excess Collateral is included within the same tax parcel or lot of record as the porti ons of such Properties that are intended to constitute Collateral hereunder. Subject to the terms and conditions of this Section 7.17, Lender agrees to execute and deliver to Borrower a partial release instrument (in recordable form) of the lien of the Mortgage and the other Loan Documents as to any portion of such Excess Collateral (each, an “Excess Collateral Release”), provided that in connection with each such Excess Collateral Release, each and every one of the following conditions are satisfied (to be determined by Lender in the exercise of its reasonable judgment):

(i) As of the date Lender issues such Excess Collateral Release, no monetary Potential Default (which solely for the purposes of this provisions means a failure to make a payment of a liquidated sum of money on the due date thereof but for which the applicable grace period has yet to expire) then exists, and no Event of Default shall exist;

(ii) Borrower shall have submitted a written request for such Excess Collateral Release no less than thirty (30) days prior to the anticipated issuance thereof, such request (A) identifying the portion of the Property subject to such requested Excess Collateral Release, (B) to include an approved site or subdivision plan delineating the portion of the Property subject to such requested Excess Collateral Release and the portion of the Property to remain within the Portfolio, (C) all necessary easements and other agreements preserving all necessary rights associated with the Property to remain within the Portfolio, and (D) containing all other information required hereunder. Such written reque st shall also include a certificate in form reasonably acceptable to Lender from an Authorized Representative of Borrower certifying that: (1) in connection with any subdivision of the applicable Property necessary to accommodate the subject Excess Collateral Release, Borrower Parties have complied with all Legal Requirements and obtained all approvals required under any Leases, Permitted Encumbrances, or other contracts or agreements applicable to such Property (said certification to include copies of all such approvals required pursuant to Legal Requirements, Leases, Permitted Encumbrances or other contracts or agreements applicable to such Property); (2) that the requested Excess Collateral Release does not violate any of the provisions of Leases, Permitted Encumbrances, or other contracts or agreements and that the purchaser or transferee has assumed all of Borrower Parties’ obligations, if any, relating to the portion of such Property subject to the Excess Collateral Release under such Leases, Per mitted Encumbrances, or other contracts or agreements and Borrower Parties have been released from the payment or performance of any obligations thereunder thereafter arising; (3) that any subdivision necessary for the requested Excess Collateral Release shall not materially and adversely affect the utility, access, driveways, parking, drainage flows, operation or any other use of the remaining portion of the affected Property and the Improvements thereon in conformance with all Legal Requirements; and (4) no Tenants at the remaining portion of the affected Property will be relocated to the portion of such Property subject to the Excess Collateral Release (but the foregoing prohibition on the relocation of any Tenant shall not prohibit any Tenant from expanding into all or any portion of such Property subject to the Excess Collateral Release);

(iii) Concurrently with Lender’s execution and delivery of each Excess Collateral Release, Lender must receive payment of all reasonable costs and expenses incurred by Lender in connection with such Excess Collateral Release, including reasonable outside counsel attorneys’ fees and expenses; and

(iv) Lender shall have confirmed in the exercise of its reasonable judgment, that no Property remaining within the Portfolio will, following the issuance of the requested Excess Collateral Release, be adversely affected by such partial release because such remaining Property relied on the Property to be released for compliance with all Legal Requirements (including zoning, subdivision, shared parking, utilities and/or access).

(b) Upon approval of a requested Excess Collateral Release and satisfaction of the terms and conditions specified in this Section 7.17, Lender shall execute and deliver to Borrower Parties the Excess Collateral Release.

ARTICLE 8.

0; EVENTS OF DEFAULT

Section 8.1. Defaults. The Obligations shall, at the option of Lender, become immediately due and payable, interest under the Note shall begin to accrue at the Default Rate, and Lender shall be entitled to pursue all available rights and remedies, upon the occurrence and during the existence of any one or more of the following events (individually an “Event of Default” and collectively, “Events of Default”); provided that the following acts, omissions or conditions shall not be deemed to constitute an “Event of Default” (and thereby cause interest to accrue at the Default Rate and/or entitle Lender to pursue all available rights and remedies) until any and all specified grace or cure periods have expired:

(a) If any monthly installment of Debt Service and/or Impounds (if any) is not received by Lender on or before 2 p.m. (Hartford, Connecticut time) on the fifth (5th) day of the month in which such installment is due;

(b) If the Obligations are not paid in full on the Maturity Date;

(c) If any other amounts reserved under this Agreement (including payments required under Section 9.5) are not received by Lender prior to the expiration of the applicable Demand Period;

(d) If Borrower Parties (1) fail to comply with any of their duties and obligations under Subsection 3.1(a) in any respects, or (2) fail to comply with their duties and obligations under Subsection 3.1(b) through (i) in all material respects, subject to the notice and cure periods specified in Section 3.1(g);

(e) If any Borrower Party fails to provide any material aspect of the financial reporting required pursuant to Section 6.1, and such failure continues for thirty (30) days following written notice from Lender of such failure;

(f) If any fact, circumstance or event (other than those specifically addressed elsewhere in this Article 8) shall occur that is specifically characterized under any provision of any other Loan Document as an “Event of Default” under such Loan Document;

(g) If any Federal or state tax Lien (other than an inchoate lien for local real estate taxes and assessments not yet due and payable) is filed against any Borrower Party and the same is not discharged of record within sixty (60) days after the same is filed, unless (1) such tax Lien is being diligently contested by the applicable Borrower Party in good faith, (2) the applicable Borrower Party, as the case may be, shall have deposited with Lender cash reserves (or other appropriate security acceptable to Lender in its discretion) which, in the opinion of Lender, will be sufficient to cover the tax Lien and all interest and penalties thereon, and (3) Lender is satisfied that such tax Lien does not have a materially adverse effect on the business, assets or financial or other condition of any Borrower Party, as the case may be, or on any Property, the Mortgage or the Lien thereof;

(h) If a Transfer occurs in violation of the covenants set forth in Section 7.1;

(i) Intentionally omitted;

(j) If any representation or warranty of or on behalf of any Borrower Party, made in this Agreement, the Carveout Indemnity, the Environmental Indemnity Agreement or in any of the other Loan Documents, or in any certificate, report, financial statement or other instrument furnished by or on behalf of any Borrower Party in connection with this Agreement, the Carveout Indemnity, the Environmental Indemnity Agreement or any other Loan Document, shall prove false or misleading in any material respect as of the date made or furnished;

(k) If any Borrower Party shall make an assignment for the benefit of creditors;

(l) If a court of competent jurisdiction enters a decree or order appointing a receiver, liquidator, assignee, trustee, custodian, examiner, magistrate, arbitrator, sequestrator (or similar official) of any Borrower Party, or of any substantial part of their respective properties or assets, or if such court decrees or orders the winding up or liquidation of the affairs of any Borrower Party, and any such decree or order is not dismissed, discharged or vacated of record within ninety (90) days after the same has been entered;

(m) If any Borrower Party voluntarily files a petition for relief or an answer or consent seeking relief under the Bankruptcy Code, or under any other Federal or state bankruptcy, insolvency or other similar law, rule or regulation;

(n) If an involuntary case or other proceeding is commenced against any Borrower Party or any Property which seeks liquidation, reorganization or other relief with respect to debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of ninety (90) days;

(o) If any Borrower Party, whether by operation of law or otherwise, dissolves, is wound up or its existence is otherwise terminated or dissolved;

(p) If Carveout Indemnitor is not the sole general partner of each Individual Borrower or does not control the exercise of all rights, powers and privileges related thereto in violation of the terms, conditions and covenants set forth in Section 7.1(d);

(q) If any Property becomes subject to any lis pendens, notice of pendency, stop order, notice of intention to file mechanic’s or material supplier’s lien, mechanic’s or material supplier’s lien (excluding, however, any noticed filed pursuant to applicable state law solely to preserve future lien rights) or other Lien of any nature whatsoever (other than Permitted Encumbrances) and the same shall not either be discharged of record or in the alternative insured over to the satisfaction of Lender by the Title Company within a period of sixty (60) days after the same is filed or recorded (irrespective of whether the same is superior or subordinate in Lien or other priority to the Lien of the Mortgage and irrespecti ve of whether the same constitutes a perfected or inchoate Lien or encumbrance on such Property or is only a matter of record or notice), subject to the right of Borrower Parties to contest same as set forth in Section 7.2(b);

(r) If Borrower fails to remit payment in full of the Loan and other Obligations (1) pursuant to Section 2.4(b) on the date identified in the Prepayment Notice following the issuance of any Prepayment Notice, unless the Prepayment Notice is revoked in accordance with Section 2.4(c), or (2) within the time period specified in Sections 3.2 or 3.3 if Borrower Parties make an election to, or are required by Lender to, prepay the Obligations following a Casualty or condemnation;

(s) If any Borrower Party ceases to operate any Property in a manner consistent with the uses of such Property effective as of the Funding Date or terminates such business for any reason whatsoever (other than temporary cessation in connection with any renovations to any Property or completion of a Restoration);

(t) If any Borrower Party (as the case may be) fails to comply with its duties and obligations under (1) the Assignment of Property Documents and such failure continues for thirty (30) days after written notice from Lender; (2) the Environmental Indemnity Agreement and such failure continues for thirty (30) days after written notice from Lender (provided, however, that if a shorter cure period is required by Lender (in the exercise of its discretion) because of a potential impairment to human safety or a potential material impairment to the value of any Property, then Borrower Parties sha ll have such shorter cure period as set forth in Lender’s written notice); (3) the Carveout Indemnity and such failure continues for fifteen (15) days after written notice from Lender); (4) the Assignment of Leases and Rents and such failure continues for fifteen (15) days after written notice from Lender; or (5) any Assignment of Management Agreement and such failure continues for fifteen (15) days after written notice from Lender; provided, however, that so long as (A) any such failure does not involve the failure to make payment of a liquidated sum of money (which must be paid within any applicable Demand Period), (B) an extension of the applicable cure period will not, in the reasonable estimation of Lender, cause a material impairment to the value, use, utility, or operation of any Property, the Portfolio or the other Collateral, (C) an extension of the applicable cure period will not, in the reasonable estimation of Lender, expose Lender to any fines or penalties (whether civil or criminal), (D) any such failure cannot reasonably be cured within the applicable cure period, and (E) the applicable Borrower Party shall have commenced a reasonable cure for such Potential Default within the applicable cure period and thereafter diligently and expeditiously proceeds to cure the same, then the applicable cure period shall be extended for so long as it shall be reasonably necessary for such Borrower Party, in the exercise of due diligence, to cure such Potential Default (Borrower Parties agreeing that they shall bear the burden of proof before any court, arbitrator or other trier of fact in connection with establishing the reasonableness of any cure or extended cure period and/or that Lender is acting in a commercially unreasonable manner if Lender makes a determination adverse to such Borrower Party under subsections (B) or (C) of this subparagraph (t)); provided further, that in no event shall the cure period available under this subparagraph (t) exceed ninety (90) days in the aggregate; or

(u) If any Borrower Party shall fail to comply with any of their respective covenants, agreements, warranties, duties or obligations under this Agreement or any other Loan Document that is not otherwise specifically addressed in this Article 8 and such failure continues for thirty (30) days after written notice from Lender; provided, however, that so long as (A) any such failure does not involve the failure to make payment of a liquidated sum of money (which must be paid within any applicable Demand Period), (B) an extension of the thirty (30) day cure period will not, in the reasonable estimation of Lender, cause a material impairment to the value, use, utility, or operation of any Property, the Portfolio or the other Collateral, (C) an extension of the thirty (30) day cure period will not, in the reasonable estimation of Lender, expose Lender to any fines or penalties (whether civil or criminal), (D) any such failure cannot reasonably be cured within the thirty (30) day cure period, and (E) the applicable Borrower Party shall have commenced a reasonable cure for such Potential Default within the thirty (30) day cure period and thereafter diligently and expeditiously proceeds to cure the same, then the thirty (30) day cure period shall be extended for so long as it shall be reasonably necessary for the applicable Borrower Party, in the exercise of due diligence, to cure such Potential Default (Borrower Parties agreeing that they shall bear the burden of proof before any court, arbitrator or other trier of fact in connection with establishing the reasonableness of any cure or extended cure period and/or that Le nder is acting in a commercially unreasonable manner if Lender makes a determination adverse to such Borrower Party under subsections (B) or (C) of this subparagraph (u)); provided, further, that in no event shall the cure period available under this subparagraph (u) exceed ninety (90) days in the aggregate.

Section 8.2. Remedies.

(a) Upon the occurrence of any Event of Default, interest shall automatically begin to accrue at the Default Rate, and at the option of Lender (except in connection with any of the Events of Default described in Section 8.1(k) through (o), when acceleration is automatic), all Obligations shall become immediately due and payable, and Lender may exercise all rights and remedies under the Loan Documents and at law or in equity, all without written notice and without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate the maturity thereof, notice of acceleration of the maturity thereof, or any other notice of default of any kind, all of which are hereby expressly waived by each Borrower Party for its elf and all other Borrower Parties.

(b) Upon the occurrence of any of the events specified in Section 8.1(k) through (o), interest shall automatically begin to accrue at the Default Rate, all Obligations shall automatically become immediately due and payable, and Lender may exercise all rights and remedies under the Loan Documents and at law or in equity, all without written notice and without presentment, demand, protest, notice of protest or dishonor, notice of intent to

accelerate the maturity thereof, notice of acceleration of the maturity thereof, or any other notice of default of any kind, all of which are hereby expressly waived by each Borrower Party for itself and all other Borrower Parties.

Section 8.3. Lender’s Right to Perform the Obligations.

(a) If a Borrower Party shall fail, refuse or neglect to make any payment or perform any act required by the Loan Documents and such failure constitutes an Event of Default, then without notice to or demand upon any Borrower Party or any other Person, and without waiving or releasing any other right, remedy or recourse Lender may have because of such Event of Default, Lender may (but shall not be obligated to) make such payment or perform such act for the account of and at the expense of Borrower Parties, and shall have the right to enter upon any Property for such purpose and to take all such action thereon and with respect to such Property as it may deem necessary or appropriate.

(b) If Lender shall elect to pay any sum due with reference to any Property, Lender may do so in reliance on any bill, statement or assessment procured from the appropriate Governmental Authority or other issuer thereof without inquiring into the accuracy or validity thereof. Similarly, in making any payments to protect the security intended to be created by the Loan Documents, Lender shall not be bound to inquire into the validity of any apparent or threatened adverse title claim, Lien, encumbrance, claim or charge before making an advance for the purpose of preventing or removing the same.

(c) Each Individual Borrower shall jointly and severally indemnify, defend and hold Lender harmless from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever, including reasonable attorneys’ fees, incurred or accruing by reason of any acts performed by Lender pursuant to the provisions of this Section 8.3, including those arising from the joint, concurrent, or comparative negligence of Lender, except as a result of Lender’s gross negligence or willful misconduct. All sums paid by Lender pursuant to this Section 8.3, and all other sums expended by Lender to which it shall be entitled to be indemnified, shall be paid by Borrower to Lender prior to expiration of the Demand Period. Any costs and expenses due and payable to Lender pursuant to this Section 8.3 shall bear interest at the Default Rate from the expiration of the Demand Period until payment in full is received by Lender, and if Borrower fails to reimburse Lender within the Demand Period, then Lender may, in its discretion, either (i) without additional notice to Borrower, add such amounts to the principal balance of the Obligations to accrue interest at the Contract Rate and be secured by the Loan Documents, or (ii) deem the failure by Borrower to make timely reimbursement as an Event of Default and continue to accrue interest at the Default Rate in connection with such unpaid amounts until repayment in full.

ARTICLE 9.

0; MISCELLANEOUS

Section 9.1. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and either shall be sent by overnight air courier service, or personally delivered to a representative of the receiving party. All such communications shall be mailed or delivered, addressed to the party for whom it is intended at its address set forth below. Any single notice sent to a Borrower Party pursuant to the terms of this Section 9.1 shall be deemed to have been simultaneously given to all Borrower Parties.

If to a Borrower

Party: c/o Mission West Properties, Inc.

10050 Bandley Drive

Cupertino, California 95014

Attention: Ray V. Marino,

President and Chief Operating Officer

Telephone: 408-725-0700

E-mail: rmarino@missionwest.com

If to Lender: c/o Hartford Investment Management Company

55 Farmington Avenue

Hartford, Connecticut 06105

Attn: Steve Kalmin

Vice President - Real Estate Asset Management

Telephone: (860) 297-6479

E-mail: steve.kalmin@himco.com

with a copy to

concurrently to: Robert W. McKay, Esq.

c/o Hartford Investment Management Company

55 Farmington Avenue

Hartford, Connecticut 06105

Telephone: (860) 297-6449

E-mail: robert.mckay@himco.com

Any communication so addressed and mailed shall be deemed to be given on the earliest of (1) when actually delivered or (2) on the first Business Day after deposit with an overnight air courier service, if such deposit is timely and appropriate in accordance with the requirements of such courier service for next business day delivery, in either case to the address of the intended addressee (except as otherwise provided in the Mortgage), and any communication so delivered in person shall be deemed to be given when receipted for by, or actually received by Lender or a Borrower Party, as the case may be. Either party may designate a change of address within the United States of America by written notice to the other by giving at least ten (10) days prior written notice of such change of address.

Section 9.2. Amendments and Waivers. No purported amendment or waiver of any provision of the Loan Documents shall be effective unless in writing and signed by the party against whom enforcement is sought.

Section 9.3. Limitation on Interest. Under no circumstances shall the aggregate amount paid or agreed to be paid as interest under the Loan Documents exceed the highest lawful rate permitted under applicable usury law of the State or of any state in which any Property is located, and the payment obligations of Borrower Parties under the Loan Documents are hereby limited accordingly. If under any circumstances, whether by reason of advancement or acceleration of the unpaid principal balanc e of the Loan or otherwise, the aggregate amounts paid on the Loan shall include amounts which by law are deemed interest and which would exceed such highest lawful rate, Borrower Parties hereby stipulate that payment and collection of such excess amounts shall have been and will be deemed to have been the result of a mistake on the part of both Borrower Parties and Lender, and Lender shall, at its option, either return such excess to Borrower Parties or credit such excess against the principal balance of the Obligations then outstanding (without application of any Applicable Prepayment Fee), in which event any and all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable.

Section 9.4. Invalid Provisions. If any provision of any Loan Document is held to be illegal, invalid or unenforceable, then (i) such provision shall automatically be deemed fully severable; (ii) the Loan Documents shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; (iii) the remaining provisions of the Loan Documents shall remain in full effect and shall not be affected by the illegal, invalid, or unenforceable provision or by i ts severance therefrom; and (iv) in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Loan Document a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible so that said substitute provision is legal, valid and enforceable.

Section 9.5. Payment and Reimbursement of Expenses.

(a) In addition to its reimbursement or payment obligations set forth elsewhere in this Agreement or in the other Loan Documents, and prior to the expiration of any Demand Period, Borrower Parties shall pay to Lender or, at Lender’s option, shall reimburse Lender, for all reasonable costs and expenses (including reasonable attorneys’ fees and disbursements and fees and expenses of appraisers and environmental professionals) incurred by Lender in connection with (i) intentionally omitted; (ii) intentionally omitted; (iii) the negotiation, preparation,

execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and the other Loan Documents and any other documents or matters (including leasing matters) requested by Borrower Parties; (iv) the filing and recording fees and expenses, title insurance and reasonable fees and expenses of attorneys for providing to Lender all required legal opinions, and other similar expenses incurred, in creating and perfecting the Liens and security interest in favor of Lender pursuant to this Agreement and the other Loan Documents; (v) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting a Borrower Party, this Agreement, the other Loan Documents, the Portfolio, or any other security given for the Obligations; and (vi) enforcing any obligations of or coll ecting any payments due from Borrower Parties under this Agreement, the other Loan Documents or with respect to the Portfolio or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a “work-out” or of any insolvency or bankruptcy proceedings.

(b) Any costs and expenses due and payable to Lender pursuant to this Section 9.5 shall bear interest at the Default Rate from the expiration of the applicable Demand Period until Lender receives payment in full. If Borrower Parties fail to reimburse Lender prior to the expiration of the applicable Demand Period, then Lender may, in its discretion, either (i) without additional notice to Borrower Parties, add such amounts to the principal balance of the Obligations to accrue interest at the Contract Rate and be secured by the Loan Documents, or (ii) deem the failure of Borrower Parties to make timely reimbursement to be an Event of Default and continue to accrue interest at the Default Rate in connectio n with such unpaid amounts until repayment in full.

Section 9.6. Approvals; Third Parties; Conditions. All approval rights retained or exercised by Lender with respect to Leases, contracts, plans, studies and other matters shall not be deemed or construed as a determination that Lender has passed on the adequacy thereof for any other purpose and may not be relied upon by Borrower Parties or any other Person. This Agreement is for the sole and exclusive use of Borrower Parties and Lender and may not be enforced, nor relied upon, by any Pers on other than Borrower Parties and Lender. All conditions of the obligations of Lender hereunder, including Lender’s discretionary right to make protective advances pursuant to Sections 8.3 or 9.5, are imposed solely and exclusively for the benefit of Lender, its successors and assigns, and no other Person shall have standing to require satisfaction of such conditions or be entitled to assume that Lender will refuse to make advances (if any) in the absence of strict compliance with any or all of such conditions, and no other Person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by Lender at any time in Lender’s discretion.

Section 9.7. Lender Not in Control; No Partnership. None of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, give Lender the right or power to exercise control over the affairs or management of a Borrower Party, the power of Lender being limited to the rights to exercise the remedies referred to in the Loan Documents, at law or in equity. The relationship between Borrower Parties and Lender is, and at all times shall remain, solely that of debtor and creditor. No covenant or provision of the Loan Documents is intended, nor shall it be deemed or construed, to create a partnership, joint venture, agency or common interest in profits or income between Lender and Borrower Parties or to create any equity in the Portfolio in Lender. Lender neither undertakes nor assumes any responsibility or duty to Borrower Parties or to any other Person with respect to the Portfolio or the Loan, except as expressly provided in the Loan Documents, and notwithstanding any other provision of the Loan Documents: (i) Lender is not, and shall not be construed as, a partner, joint venturer, alter ego, manager, controlling person or other business associate or participant of any kind of a Borrower Party or its stockholders, members, or partners (as the case may be) and Lender does not intend to ever assume such status; (ii) Lender shall in no event be liable for any Debts, expenses or losses incurred or sustained by a Borrower Party; and (iii) Lender shall not be dee med responsible for or a participant in any acts, omissions or decisions of a Borrower Party or its stockholders, members, or partners (as the case may be). Lender and Borrower Parties each disclaim any intention to create any partnership, joint venture, agency or common interest in profits or income between Lender and a Borrower Party, or to create equity in the Portfolio in Lender, or any sharing of liabilities, losses, costs or expenses.

Section 9.8. Time of the Essence. Time is of the essence with respect to the performance of each Borrower Parties’ obligations under the Loan Documents.

Section 9.9. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Lender, Borrower Parties and their respective successors and assigns, provided that no Borrower Party shall, without the prior written consent of Lender (which may be granted or withheld in Lender’s discretion) or except as expressly permitted pursuant to Section 7.1, assign any rights, duties or obligations hereunder or under an y other Loan Document.

Section 9.10. Servicing, Transfers, Assignments and Participations.

(a) At the option of Lender, the Loan may be serviced by a servicer (the “Servicer”) selected by Lender from time to time and Lender may delegate all or any portion of its responsibilities under this Agreement and the other Loan Documents to the Servicer pursuant to a servicing agreement between Lender and Servicer. Servicer shall be entitled to reimbursement of costs and expenses as and to the same extent (but without duplication) as Lender is entitled thereto under the applicable provisions of this Agreement and the other Loan Documents, provided that Borrower Parties shall not be oblig ated to pay any servicing fee payable to the Servicer by Lender. Upon notice thereof from Lender, Servicer shall have the right to exercise all rights of Lender and enforce all obligations of Borrower Parties pursuant to the provisions of this Agreement, the Note and the other Loan Documents. Provided Borrower Parties shall have been given notice of Servicer’s address by Lender, Borrower Parties shall deliver to Servicer duplicate originals of all notices and other instruments which Borrower Parties may or shall be required to deliver to Lender pursuant to this Agreement, the Note and the other Loan Documents (and no delivery of such notices or other instruments by Borrower Parties shall be of any force or effect unless delivered to Lender and Servicer as provided above).

(b) Lender may at any time sell, transfer or assign the Note, this Agreement, the Mortgage, and the other Loan Documents, and any or all servicing rights with respect thereto or grant participations therein or issue mortgage pass-through certificates, provided that Lender shall remain as the “lead” lender and primary contact for all required consents and approvals under the Loan Documents. Lender may forward to any present, future or prospective purchaser, assignee, servicer, participant or investor (each, a “Transferee”), all documents and information which Lender now h as or may hereafter acquire relating to any Borrower Party or the Portfolio, whether furnished by a Borrower Party, any Property Manager or any other Person, as Lender determines necessary or desirable; provided that Lender receives a reasonable undertaking from the applicable Transferee to maintain the confidential nature (if any) of such information. Each Borrower Party shall cooperate with Lender in connection with any transfer made pursuant to this Section 9.10, including the delivery of an estoppel certificate and such other documents as may be reasonably requested by Lender. Each Borrower Party shall also furnish, and hereby consents to Lender furnishing to such Transferee, any and all current or updated information concerning its financial condition and any and all information concerning the Portfolio as may be requested by Lender or any Transferee; provided that Lender receives a reasonable undertaking from the applicable Transferee to maintain the confidential nature (if any) of such information. No exercise by Lender of any transfer rights pursuant hereto shall operate to release or diminish the duties, obligations or liabilities of any Borrower Party under this Agreement or the other Loan Documents.

(c) Without in any way limiting Lender’s other rights hereunder, Lender shall have the right, in its discretion at any time after the Funding Date, to require Borrower Parties to split the Loan into one or more loans secured by the Portfolio (individually, a “Split Loan” and collectively, the “Split Loans”), provided that (i) the aggregate principal amount of all notes evidencing the Split Loans shall equal the outstanding principal balance of the Loan immediately prior to the creation of such split notes, (ii) the aggregate d ebt service payments on the Split Loans shall on the date created equal the debt service payment which was due under the Loan immediately prior to the creation of such Split Loans, and (iii) the other terms and provisions of the documents evidencing and/or securing the Split Loans shall be substantially similar in form and substance to the Loan Documents. Borrower Parties, at no cost or expense to it, shall cooperate with all reasonable requests of Lender in order to establish the Split Loans and shall execute and deliver such documents as shall be reasonably required by Lender in connection therewith, all in form and substance reasonably satisfactory to Lender, including modified and severed notes, mortgages and other security documents in such denominations as Lender shall determine in its discretion, release documents and any and all documents necessary to assign the Split Loans.

Section 9.11. Replacement Documents. Upon receipt of an affidavit of an officer of Lender as to the loss, theft, destruction or mutilation of the Note or any other document(s) which is not of public record and, in the

case of any such destruction or mutilation, upon surrender and cancellation of the Note or other document(s), Borrower Parties shall issue, in lieu thereof, a replacement Note or other document(s) in the same principal amount thereof and otherwise of like tenor.

Section 9.12. Renewal, Extension or Rearrangement. All provisions of the Loan Documents shall apply with equal effect to each and all promissory notes and amendments thereof hereinafter executed which in whole or in part represent a renewal, extension, increase or rearrangement of the Loan.

Section 9.13. Waivers. No course of dealing on the part of Lender, its officers, employees, attorneys, consultants or agents, nor any failure or delay by Lender with respect to exercising any right, power, privilege or remedy of Lender under any of the Loan Documents, shall operate as a waiver thereof.

Section 9.14. Cumulative Rights. All rights and remedies of Lender under the Loan Documents, at law or in equity shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy.

Section 9.15. Exhibits and Schedules. The exhibits and schedules attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein.

Section 9.16. Titles of Articles, Sections and Subsections. All titles or headings to articles, sections, subsections or other divisions of this Agreement and the other Loan Documents or the exhibits hereto and thereto, are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto.

Section 9.17. Promotional Material. Borrower Parties authorizes Lender to issue press releases, advertisements and other promotional materials in connection with Lender’s own promotional and marketing activities, and describing the Loan in general terms or in detail and Lender’s participation in the Loan. All references to Lender contained in any press release, advertisement or promotional material issued by any Borrower Party must be approved in writing by Lender in advance of issuance.

Section 9.18. Survival. All of the representations, warranties, covenants, and indemnities made in this Agreement, the Environmental Indemnity Agreement or any other Loan Document shall survive the repayment in full of the Obligations and the release of the Liens evidencing or securing the Loan, and shall survive the transfer (by sale, foreclosure, conveyance in lieu of foreclosure or otherwise) of any or all right, title and interest in and to all or any portion of the Collateral to any party.

Section 9.19. Governing Law. The Loan Documents are being executed and delivered, and are intended to be performed, in the State and the laws of the State and of the United States of America shall govern the rights and duties of the parties hereto and the validity, construction, enforcement and interpretation of the Loan Documents, except to the extent otherwise specified in any of the Loan Documents.

Section 9.20. Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between Lender and Borrower and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

Section 9.21. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document.

Section 9.22. Obligations of Borrower, Joint and Several. If more than one Person has executed this Agreement or any other Loan Document as “Borrower”, “Grantor” or “Assignor”, the obligations of all such Persons hereunder or thereunder shall be joint and several.

Section 9.23. WAIVER OF PUNITIVE OR CONSEQUENTIAL DAMAGES. NEITHER LENDER NOR BORROWER PARTIES SHALL BE RESPONSIBLE OR LIABLE TO THE OTHERS OR TO ANY OTHER PERSON FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THE LOAN OR THE TRANSACTION CONTEMPLATED HEREBY, INCLUDING ANY BREACH OR OTHER DEFAULT BY ANY PARTY HERETO.

Section 9.24. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH BORROWER PARTY AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF ANY PARTY OR ANY EXERCISE BY ANY PARTY OF THEIR RESPECTIVE RIGHTS UNDER THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE LOAN OR THE COLLATERAL (INCLUDING ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND ANY CLAIM OR DEFENSE ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER THIS AGREEMENT.

ARTICLE 10.

0; LIMITATIONS ON LIABILITY

Section 10.1. Limitation on Liability.

(a) Subject to the qualifications and exceptions set forth below, Lender shall not enforce the liability and obligations of Borrower to perform and observe its duties and obligations contained in the Note, this Agreement, the Mortgage or the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against any Borrower Party, provided that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Note, any Guaranty, this Agreement, the Mortgag e and the other Loan Documents, or in the Collateral given to Lender pursuant to the Loan Documents; provided, further, that, subject to the qualifications and exceptions set forth below, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of its interest in the Collateral, and Lender, by accepting the Note, this Agreement, the Mortgage and the other Loan Documents, agrees that subject to the qualifications and exceptions set forth below, it shall not sue for, seek or demand any deficiency judgment against Borrower, any other Borrower Party or any officer, director, manager, member or partner of Borrower in any such action or proceeding under or by reason of or under or in connection with the Note, this Agreement, the Mortgage or the other Loan Documents.

(b) Notwithstanding anything to the contrary set forth in this Agreement or the other Loan Documents:

(i) the provisions of Section 10.1(a) shall not:

(A) Constitute a waiver, release or impairment of any obligation evidenced or secured by any of the Loan Documents;

(B) Impair the right of Lender to name any Borrower Party as a party defendant in any action or suit for foreclosure and sale under the Mortgage;

(C) Affect the validity or enforceability of the Carveout Indemnity, affect the liability, duties and obligations of Carveout Indemnitor under the Carveout Indemnity, or affect any of the rights and remedies of Lender under the Carveout Indemnity;

(D) Impair the right of Lender to obtain the appointment of a receiver or affect the validity or enforceability of the Assignment of Leases and Rents, affect the liability, duties and

obligations of any Borrower Party under the Assignment of Leases and Rents, or affect any of the rights and remedies of Lender under the Assignment of Leases and

Rents;

(E) Affect the validity or enforceability of the Environmental Indemnity Agreement, affect the liability, duties and obligations of any Borrower Party under the Environmental Indemnity Agreement, or limit the rights and remedies of Lender under the Environmental Indemnity Agreement; or

(F) Constitute a prohibition against Lender to seek a deficiency judgment against any Borrower Party solely in order to satisfy procedural requirements necessary to fully realize the security granted by the Mortgage or under any other Loan Documents, or to commence any other appropriate action or proceeding in order for Lender to exercise its remedies against the Collateral; (and in no event shall any such deficiency judgment issued solely in order to satisfy procedural requirements be enforced against assets of any Borrower Party other than the Collateral) and

(ii) Each Individual Borrower, jointly and severally, and jointly and severally with Carveout Indemnitor pursuant to the Carveout Indemnity, hereby agrees to indemnify and reimburse Lender, within the Demand Period (and nothing set forth in this Section 10.1 shall constitute a waiver of the right of Lender to enforce the liability and obligation of Borrower Parties, by money judgment or otherwise), to the extent of any and all liabilities, costs, losses (including any reduction in value of any Property or any other Collateral or the loss of Lender’s security interest therein), damages, expenses (including reasonable attorneys’ fees and disbursemen ts, and court costs, if any), or claims suffered or incurred by Lender by reason of or in connection with any of the following:

(A) Any fraud committed by any Borrower Party in connection with the Loan;

(B) Any material misrepresentation contained in any of the Loan Documents or any report furnished pursuant to any of the Loan Documents by any Borrower Party;

(D) The failure of any Borrower Party to apply Operating Revenues received by any Borrower Party to pay Debt Service, Impounds (if any), Operating Expenses (including in fulfilling the obligations of any Individual Borrower as “landlord” under any Lease) and reasonable and necessary capital expenditures or costs during the 12-month period immediately preceding the occurrence of the Event of Default triggering Lender’s exercise of remedies; provided, however, that Borrower shall not have liability under this subparagrap h (D) to the extent Operating Revenues generated during the 12-month period immediately preceding the occurrence of the Event of Default triggering Lender’s exercise of remedies were not sufficient to pay in full all such amounts and all Operating Revenues so received by any Borrower Party were applied to pay such amounts to the full extent of Operating Revenues so received;

(E) The misappropriation of any Net Proceeds or condemnation awards by any Borrower Party;

(F) The failure of any Borrower Party to (x) properly apply any and all security deposits held by any Borrower Party, (y) properly return same to Tenants when due, or (z) deliver security deposits to Lender, any receiver or any Person purchasing any Property or any part thereof at a foreclosure sale or upon the taking of possession of such Property or any part thereof by Lender, such receiver or such other Person; provided, however, that Borrower shall not have the liability under this subparagraph (F) if the required activity under (z) above is limited or prohibited by applicable Legal Requirements or if Borrower is operating under the express written direction of Lender;

(G) Intentional removal or destruction of property (without the concurrent replacement thereof with property of at least equivalent value and utility) constituting any material portion of the Collateral, or any other intentional and material waste of any portion of the Collateral, by any Borrower Party;

(H) Any Borrower Party contesting or in any way interfering with, directly or indirectly, any foreclosure action, Uniform Commercial Code sale and/or deed in lieu of foreclosure transaction commenced by Lender or with any other enforcement of Lender’s rights, power or remedies under any of the Loan Documents (whether by making any motion, bringing any counterclaim, claiming any defense, seeking any injunction or other restraint, commencing any action or otherwise) in connection with Lender’s rights arising from an Event of Default; provided, however, that if any Borrower Party obtains a final, non-appealable order successfully contesting the exercise by Lender of a right or remedy, then Borrower shall not have liability under this subparagraph (H);

(I) Any Borrower Party (i) filing a voluntary petition under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or (ii) making an assignment for the benefit of creditors; or

(J) Any Borrower Party (i) filing, or joining in the filing of, an involuntary petition against any other Borrower Party under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or (ii) soliciting or causing to be solicited petitioning creditors for any involuntary petition against any other Borrower Party, or (iii) filing an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against any other Borrower Party by any other Person under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or (iv) voting adversely to Lender’s interest in any proceeding under the Ba nkruptcy Code or any other state or Federal bankruptcy or insolvency law which involves any Borrower Party or any portion of the Collateral, or (v) consenting to or acquiescing or joining in an application for the appointment of a custodian, receiver, trustee or examiner for any Borrower Party or any portion of the Collateral (unless such action is at the written request of Lender).

Notwithstanding the foregoing, if Borrower and any necessary Borrower Parties consent, pursuant to a stipulation in form reasonably required by Lender (to be executed by Borrower and any necessary Borrower Parties and delivered to Lender within five (5) Business Days following Lender’s request), to the appointment of a receiver for any Property identified by Lender (the identity of such receiver to be designated by Lender and approved by Borrower Parties, such approval not to be unreasonably withheld), and no Borrower Party seeks or participates in the removal of said receiver (absent a material violation by said receiver of the order appointing the receiver, in which case a substitute receiver designated by Lender and approved by Borrower Parties, such approval not to be unreasonably withheld, will be appointed) then Borrower s hall not have liability under this Subsection (b)(ii) solely as a result of any reduction in value of such Property or any other Collateral during the period that Lender is pursuing its rights and remedies as a result of an Event of Default.

(c) Notwithstanding anything to the contrary set forth in this Agreement or any of the other Loan Documents: (i) Lender shall not be deemed to have waived any right which Lender may have under Section 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Obligations or to require that all Collateral shall continue to secure all of the Obligations owing to Lender in accordance with the Loan Documents; and (ii) the Obligations shall be fully recourse to Borrower in the event any Transfer occurs in violation of Section 7.1 (including the voluntary placement of a Lien on all or any portion of the Collater al in violation of the Loan Documents).

[Remainder of this page intentionally blank. Signature Page follows.]

IN WITNESS WHEREOF, this Agreement has been executed by the undersigned and is effective as of the day and year first above written.

BORROWER:

MISSION WEST PROPERTIES, L.P.,

MISSION WEST PROPERTIES, L.P. I,

MISSION WEST PROPERTIES, L.P. II,

MISSION WEST PROPERTIES, L.P. III,

each a Delaware limited partnership

By: Mission West Properties, Inc.

a Maryland corporation

its general partner

By: /s/ Raymond V. Marino

Name: Raymond V. Marino

Title: President & COO

[Signature Page of Borrower to Fixed Rate Term Loan Agreement]

IN WITNESS WHEREOF, this Agreement has been executed by the undersigned and is effective as of the day and year first above written.

LENDER:

HARTFORD LIFE INSURANCE COMPANY,

HARTFORD LIFE AND ACCIDENT INSURANCE COMPANY,

HARTFORD LIFE AND ANNUITY INSURANCE COMPANY,

a Connecticut corporation

By: Hartford Investment Management Company,

a Delaware corporation,

Its Agent and Attorney-in-Fact

By: /s/ John M. Maher

Name: John M. Maher

Title: Executive Vice President

[Signature Page of Lender to Fixed Rate Term Loan Agreement]

EXHIBITS A-1 THROUGH A-12

LIST OF REPORTS

1. That certain zoning compliance and informational report for the Property known as 5400, 5500 and 5550 Hellyer Avenue, San Jose, California (the “Hellyer Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 5400-5550 Hellyer Avenue, San Jose, California” dated September 24, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

2. That certain zoning compliance and informational report for the Property known as 1230, 1250, 1260, 1270 and 1280 East Arques Avenue, Sunnyvale, California (the “Arques Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 1230-1280 East Arques Avenue, Sunnyvale, California” dated September 24, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

3. That certain zoning compliance and informational report for the Property known as 1212 Bordeaux Drive, Sunnyvale, California (the “Bordeaux Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 1212 Bordeaux Drive, Sunnyvale, California” dated September 24, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

4. That certain zoning compliance and informational report for the Property known as 3540, 3542, 3544, 3550, 3560 and 3580 Bassett Street, Santa Clara, California (the “Bassett Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 3540-3580 Bassett Street, Santa Clara, California” dated September 24, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

5. That certain zoning compliance and informational report for the Property known as 3236 Scott Boulevard, Santa Clara, California (the “Scott Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 3236 Scott Boulevard, Santa Clara, California” dated September 24, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

6. That certain zoning compliance and informational report for the Property known as 5981 and 5970 Optical Court, San Jose, California (the “Optical Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 5981 Optical Court, San Jose, California” dated September 25, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

7. That certain zoning compliance and informational report for the Property known as 2904 Orchard Parkway, San Jose, California (the “Orchard Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 2904-06 Orchard Parkway, San Jose, California” dated September 23, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford

Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

8. That certain zoning compliance and informational report for the Property known as 4050 Starboard Drive, Fremont, California (the “Starboard Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 4050-4070 Starboard Drive, Fremont, California” dated September 23, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

9. That certain zoning compliance and informational report for the Property known as 45738 and 45778 Northport Loop West, Fremont, California (the “Northport Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 45738-45778 Northport Loop West, Fremont, California” dated September 23, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

10. That certain zoning compliance and informational report for the Property known as 233 South Hillview Drive, Milpitas, California (the “Hillview Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 233 South Hillview, Milpitas, California” dated September 22, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life & Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

11. That certain zoning compliance and informational report for the Property known as 6311, 6321-6325, 6331, and 6341-6351 San Ignacio Avenue, San Jose, California (the “San Ignacio Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 6311-6351 San Ignacio Avenue, San Jose, California” dated September 25, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life & Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

12. That certain zoning compliance and informational report for the Property known as 10300 Bubb Road, Cupertino, California (the “Bubb Report”), entitled “Zoning and Site Requirements Summary, PZR Report For: 10300 Bubb Road, Cupertino, California” dated September 26, 2008, prepared by The Planning & Zoning Resource Corporation for Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, their affiliates, successors, assigns and participants ATIMA c/o Hartford Investment Management Company.

EXHIBIT B

Hartford Loan No. BHM04X7M6

CLOSING AFFIDAVIT

The undersigned, Raymond V. Marino, the President and COO of MISSION WEST PROPERTIES, INC., a Maryland corporation (“Carveout Indemnitor”), the General Partner of each of MISSION WEST PROPERTIES, L.P., MISSION WEST PROPERTIES, L.P. I, MISSION WEST PROPERTIES, L.P. II and MISSION WEST PROPERTIES, L.P. III, each a Delaware limited partnership (collectively, “Borrower”), acting in such capacities on behalf of Borrower and Carveout Indemnitor, being duly sworn, does hereby depose and state:

1. Borrower and Carveout Indemnitor have entered into this Closing Affidavit (this “Affidavit”) in connection with a loan made by Hartford Life Insurance Company, Hartford Life and Annuity Insurance Company and Hartford Life and Accident Insurance Company, each a Connecticut corporation (together with their respective successors and assigns, collectively, “Lender”) to Borrower in the principal amount of [$115,000,000.00] (the “Loan”) pursuant to t hat certain Fixed Rate Term Loan Agreement dated as of even date herewith by and between Borrower and Lender (the “Loan Agreement”). In connection with the Loan, Borrower has duly executed and delivered to Lender: (i) that certain Promissory Note of even date herewith, executed by Borrower, payable to the order of Hartford Life Insurance Company, a Connecticut corporation, in the stated principal amount of [$90,000,000.00], (ii) that certain Promissory Note of even date herewith, executed by Borrower, payable to the order of Hartford Life and Annuity Insurance Company, a Connecticut corporation, in the stated principal amount of [$15,000,000.00], and (iii) that certain Promissory Note of even date herewith, executed by Borrower, payable to the order of Hartford Life and Accident Insurance Company, a Connecticut corporation, in the stated principal amount of [$10,000,000.00] (collectively, the “Note”). The Note is secured by, among other things, those certain mortgages, deeds of trust, deeds to secure debt, and assignments of leases and rents, all dated as of even date herewith encumbering certain improved real estate listed on Schedule 1 hereto (collectively, the “Portfolio”). Capitalized terms used and not defined herein shall have the respective meanings given to such terms in the Loan Agreement.

2. Since September 7, 2008, except as disclosed on Exhibit “A” attached hereto, (1) no material, adverse change has occurred in the financial condition of Borrower and/or Carveout Indemnitor, or in the Net Operating Income of the Portfolio or any Property; (2) no condemnation or adverse zoning or usage change proceeding has been initiated or, to the knowledge of Borrower and Carveout Indemnitor, has been threatened against any Property; (3) no Property has suffered any material damage by fire or other casualty which has not been fully repaired; and (4) to the knowledge of Borrower and Carveout Indemnitor, no law, regulation, ordinance, moratorium, injunc tive proceeding, restriction, litigation, action, citation or similar proceeding or matter has been enacted, adopted, or threatened by any Governmental Authority, which could reasonably be anticipated to have a material, adverse effect on Borrower, Carveout Indemnitor, the Portfolio and/or any Property.

3. To the knowledge of Borrower and Carveout Indemnitor, no Event of Default exists as of the Funding Date.

4. No Leases currently exist in connection with the Portfolio other than as set forth in the Rent Roll.

5. All fees and commissions payable to real estate brokers, mortgage brokers, or any other brokers or agents in connection with the Loan have been paid as of the Funding Date.

6. The other representations and warranties contained in the Loan Agreement and in all other Loan Documents are true, accurate and complete as of the Funding Date.

7. This Affidavit is made as to matters as of the date hereof and with the knowledge that the statements herein made will be relied upon by Lender in making the Loan and this Affidavit is made for the purpose of inducing Lender to consummate and close the transactions contemplated hereby. This Affidavit shall survive the closing of the Loan and shall inure to the benefit of Lender, its successors and assigns, and loan participants. Borrower and Carveout Indemnitor hereby agree, jointly and severally, to indemnify and hold Lender harmless against any loss that Lender (or its successors and assigns) suffers as a result of the failure of the statements made herein to be true, accurate, and complete.

[Remainder of page intentionally left blank; Signature and oath page(s) to follow]

The Closing Affidavit has been executed by and on behalf of the Borrower and Carveout Indemnitor on October 1, 2008.

BORROWER:

MISSION WEST PROPERTIES, L.P.,

MISSION WEST PROPERTIES, L.P. I,

MISSION WEST PROPERTIES, L.P. II,

MISSION WEST PROPERTIES, L.P. III,

each a Delaware limited partnership

By: Mission West Properties, Inc.

a Maryland corporation

its general partner

By: /s/ Raymond V. Marino

Name: Raymond V. Marino

Title: President & COO

CARVEOUT GUARANTOR:

MISSION WEST PROPERTIES, INC.,

a Maryland corporation

By: /s/ Raymond V. Marino

Name: Raymond V. Marino

Title: President & COO

Exhibit B-1

SCHEDULE 1

ALLOCATED LOAN AMOUNTS

Borrower Property ; Allocated Loan Amount

Mission West Properties, L.P. I 10300 Bubb Road, Cupertino, California $3,250,000.00

Mission West Properties, L.P. II 1212 Bordeaux Drive, Sunnyvale, California $7,380,000.00

Mission West Properties, L.P. 5981 Optical Court, San Jose, California $11,520,000.00

5970 Optical Court, San Jose, California*

Mission West Properties, L.P. 5400 Hellyer Avenue, San Jose, California* $12,930,000.00

5500 Hellyer Avenue, San Jose, California

5550 Hellyer Avenue, San Jose, California

Mission West Properties, L.P. II 2904 Orchard Parkway, San Jose, California $8,590,000.00

Mission West Properties, L.P. II 3236 Scott Boulevard, Santa Clara, California $5,870,000.00

Mission West Properties, L.P. III 3540, 3542, 3544 Bassett Street, Santa Clara, California $21,990,000.00

3550 Bassett Street, Santa Clara, California

3560 Bassett Street, Santa Clara, California

3580 Bassett Street, Santa Clara, California

Mission West Properties, L.P. 4050 Starboard Drive, Fremont, California $3,460,000.00

Mission West Properties, L.P. 45738 & 45778 Northport Loop West, Fremont, California $3,610,000.00

Mission West Properties, L.P. II 6311 San Ignacio Avenue, San Jose, California $18,070,000.00

6321-6325 San Ignacio Avenue, San Jose, California

6331 San Ignacio Avenue, San Jose, California

6341-6351 San Ignacio Avenue, San Jose, California

Mission West Properties, L.P. 233 South Hillview Drive, Milpitas, California $9,430,000.00

Mission West Properties, L.P. I 1230 East Arques Avenue, Santa Clara, California $8,900,000.00

1250 East Arques Avenue, Santa Clara, California

1260 East Arques Avenue, Santa Clara, California

Schedule 1-1

1270 East Arques Avenue, Santa Clara, California

1280 East Arques Avenue, Santa Clara, California

* These properties are Excess Collateral as described in Section 7.17 and Schedule 2, were not appraised and are not included in the Allocated Loan Amount.

Schedule 1-2

SCHEDULE 2

EXCESS COLLATERAL

1. 5970 Optical Court, San Jose, California

2. 5400 Hellyer Avenue, San Jose, California

Schedule 2-1

SCHEDULE 4.1

RENT ROLL

CONFEIDENTIAL TREATMENT - THE RENT ROLLS ARE OMITTED

Schedule 4.1-1

SCHEDULE 5.16

PERSONAL PROPERTY

NONE

Schedule 5.16-1

SCHEDULE 5.18

LIST OF MATERIAL AGREEMENTS

NONE

EX-10.15.10 3 exh10_1510.htm ENVIORNMENTAL INDEMNITY AGREEMENT exh10_1510.htm

Exhibit 10.15.10

Hartford Loan No. BHM04X7M6

ENVIRONMENTAL INDEMNITY AGREEMENT

THIS ENVIRONMENTAL INDEMNITY AGREEMENT (this “Agreement”) is executed as of October 1, 2008, by MISSION WEST PROPERTIES, L.P., MISSION WEST PROPERTIES, L.P. I, MISSION WEST PROPERTIES, L.P. II and MISSION WEST PROPERTIES, L.P. III, each a Delaware limited partnership having its principal place of business at 10050 Bandley Drive, Cupertino, California 95014 (collectively, “Borrower”) and MISSION WEST PROPERTIES, INC., a Maryland corporation (“Carveout Indemnitor”) having its principal place of business at 10050 Bandley Drive, Cupertino, California 95014, (“Carveout Indemnitor”, and collectively with Borrower, jointly and severally, “Indemnitor”) to and for the benefit of HARTFORD LIFE INSURANCE COMPANY, HARTFORD LIFE AND ANNUITY INSURANCE COMPANY and HARTFORD LIFE AND ACCIDENT INSURANCE COMPANY, each a Connecticut corporation, having an address c/o Hartford Investment Management Company, 55 Farmington Avenue, Hartford, Connecticut 06105 (collectively, &# 8220;Indemnitee”) and the other Indemnified Parties.

RECITALS:

WHEREAS, Indemnitee is prepared to make a loan (the “Loan”) to Borrower in the principal amount of $115,000,000.00, which Loan shall be made pursuant to that certain Fixed Rate Term Loan Agreement of even date herewith (the “Loan Agreement”) and is secured by, among other things, those certain mortgages, deeds of trust and deeds to secure debt, all dated as of even date herewith (collectively, the “Mortgage”) encumbering, among other things, certain improved real estate located in the State of California, as more particularly described in Exhibit A-1 through Exhibit A-12 attached hereto.

WHEREAS, Indemnitee is unwilling to make the Loan unless Indemnitor agrees to provide the indemnifications, representations, warranties, covenants and other matters described in this Agreement for the benefit of Indemnified Parties.

WHEREAS, Indemnitor is entering into this Agreement to induce Indemnitee to make the Loan.

AGREEMENT:

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Indemnitor hereby represents, warrants, covenants and agrees for the benefit of Indemnified Parties as follows:

1. Definitions.

(a) As used in this Agreement, the following terms shall have the following meanings:

“Environmental Law” means any present and future federal, state and local laws, statutes, ordinances, rules, regulations, administrative order, any administrative policy, protocol or guideline and the like, as well as common law, relating to (i) protection of human health or the environment, (ii) Hazardous Substances, and/or (iii) liability for or costs of other actual Releases. The term “Environmental Law” includes the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act (including the Superfund Amendments and Reauthori zation Act of 1986); the Emergency Planning and Community Right-to-Know Act; the Hazardous Materials Transportation Act; the Resource Conservation and Recovery Act (including Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. The term “Environmental Law” also includes any present and future federal, state and local laws, statutes ordinances, rules, regulations, permits or authorizations and the like, as well as common law, that (a) condition transfer of property upon a negative declaration or other approval of a Governmental Authority of the environmental condition of any Property; and/or (b) require notificati on or disclosure of Releases of Hazardous Substances or other environmental condition of any Property to any Governmental Authority or other Person, whether or not in connection with transfer of title to or interest in property.

“Environmental Lien” means any and all liens and other encumbrances imposed pursuant to any Environmental Law, whether due to any act or omission of Indemnitor or any other Person.

“Environmental Reports” means any and all environmental reports with respect to any Property delivered to Indemnitee in connection with the Loan and described on Exhibit B attached hereto.

“Hazardous Substances” means any and all substances (whether solid, liquid or gas) defined, listed, or otherwise classified as pollutants, hazardous wastes, hazardous substances, hazardous materials, extremely hazardous wastes, or words of similar meaning or regulatory effect under any present or future Environmental Laws, including petroleum and petroleum products, asbestos and asbestos-containing materials, polychlorinated biphenyls, urea formaldehyde foam insulation, lead-containing materials, radon, radioactive materials, flammables and explosives, but excluding substances of kinds and in amounts ordinarily and customarily used or stored in properties similar to the Portfolio in compliance with all Environmental Laws.

“Indemnified Parties” means Indemnitee, any Person who is or will have been involved in the origination of the Loan, any Person who is or will have been involved with the servicing of the Loan, any Person in whose name the encumbrance created by the Mortgage is or will have been recorded, any Person who may hold or acquire or will have held a full or partial interest in the Loan (including Investors, as well as custodians, trustees and other fiduciaries who hold or have held a full or partial interest in the Loan for the benefit of third parties) as well as the respective directors, officers, shareholders, partners, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all o f the foregoing (including any other Person who holds or acquires, or will have held, a participation or other full or partial interest in the Loan or the Portfolio, whether during the term of the Loan or as a part of, or following, a foreclosure of the Loan and including any successors by merger, consolidation or acquisition of all or a substantial portion of Indemnitee's assets and business).

“Investors” means collectively, any purchaser, transferee, assignee, servicer, participant or investor of or in the Loan.

“Losses” means any losses, damages, costs, fees, expenses, claims, suits, judgments, awards, liabilities (including strict liabilities), obligations, debts, diminutions in value, fines, penalties, charges, costs of Remediation (whether or not performed voluntarily), amounts paid in settlement, foreseeable and unforeseeable consequential damages, litigation costs, attorneys' fees, engineers' fees, environmental consultants' fees, and investigation costs (including costs for sampling, testing and analysis of soil, water, air, building materials, and other materials and substances whether solid, liquid or gas), of whatever kind or nature, and whether or not incurred in connection with any judicial or administrative proceedings, actions, claims, suits, judgments or awards .

“Release” means any release, deposit, discharge, emission, leaking, leaching, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Substances on or under any Property.

“Remediation” means, in order to comply with Environmental Laws or any permits issued pursuant thereto, any of the following: (i) response, remedial, removal, or corrective action with respect to Hazardous Substances; (ii) activity to clean up, detoxify, decontaminate, contain or otherwise remediate any Hazardous Substance; (iii) actions to prevent, cure or mitigate any Release; and/or (iv) any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or evaluation relating to any Hazardous Substances and/or any other environmental condition in, on or under any Property.

(b) Capitalized terms not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the Loan Agreement.

(c) Unless otherwise noted, all “Section” references shall be to Sections of this Agreement. All uses of the word “including” shall mean “including, without limitation” unless the context shall indicate otherwise. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined. All references to the Loan Documents shall mean such docume nt as it is constituted as of the date hereof, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

2. Environmental Representations and Warranties. Indemnitor hereby represents to and for the benefit of Indemnified Parties that, as of the date hereof and except as otherwise disclosed by the Environmental Reports: (a) to Indemnitor’s knowledge, there are no Hazardous Substances or underground storage tanks in, on, or under any Property, except those that are both (i) in compliance with all Environmental Laws and in compliance with all permits issued pursuant thereto and (ii) fully disclosed to Indemnitee in writing pursuant to the Environmental Report; (b) to Indemnitor’s knowledge, there are no past or present Releases in, on, under or from any Propert y which have not been fully remediated in accordance with all Environmental Laws; (c) Indemnitor does not know of, and has not received, any written or oral notice or other communication from any Person (including a Governmental Authority) relating to any threat of any Release migrating to any Property; (d) to Indemnitor’s knowledge, there is no past or present non-compliance with any Environmental Law, or with permits issued pursuant thereto, in connection with any Property which has not been fully remediated in accordance with all Environmental Laws; and (e) Indemnitor does not know of, and has not received, any written or oral notice or other communication from any Person (including a Governmental Authority) relating to Hazardous Substances or Remediation thereof in connection with any Property, of possible liability of any Person pursuant to any Environmental Law in connection with any Property, any other environmental conditions in connection with any Property or any other property previously owne d or operated in common with all or any part of any Property (whether or not such property shall have been combined with all or any portion of any Property in a single property description), or any actual or potential administrative or judicial proceedings in connection with any of the foregoing. Indemnitor has delivered to Indemnitee, in writing, any and all information relating to environmental conditions in, on, under or from any Property that is known to Indemnitor (including any condition fully remediated in accordance with Environmental Laws), including any reports relating to Hazardous Substances in, on, under or from any Property and/or to the environmental condition of any Property.

3. Environmental Covenants. Indemnitor covenants and agrees that: (a) all uses and operations on or of each Property, whether by Indemnitor or any other Person, shall be in compliance in all material respects with all Environmental Laws and permits issued pursuant thereto; (b) there shall be no Releases in, on, under or from any Property, except those that are both (i) in compliance in all material respects with all Environmental Laws and with permits issued pursuant thereto and (ii) fully disclosed to Indemnitee in writing; (c) there shall be no Hazardous Substances in, on, or under any Property, except those that are both (i) in compliance in all material respects with all Environmental Laws and in compliance in all material respects with all permits issued pursuant thereto and (ii) fully disclosed to Indemnitee in writing, other than Hazardous Substances in, on or under any Property in connection with uses by Tenants contemplated by their Leases, copies of which have been delivered to Indemnitee; (d) Indemnitor shall keep each Property free and clear of all Environmental Liens; (e) Indemnitor shall, at its sole cost and expense, comply with all reasonable written requests of Indemnitee to (i) effectuate Remediation of any condition existing in violation of Environmental Laws (including a Release) in, on, under or from any Property; (ii) comply with any Environmental Law; and (iii) comply with any directive from any Governmental Authority; (f) Indemnitor shall not do, or allow any Tenant or other user of any Property to do, any act that violates Environmental Laws and permits issued pursuant thereto which materially increases the dangers to human health or the environ ment, poses an unreasonable risk of harm to any person (whether on or off such Property), materially and adversely impairs or may materially and adversely impair the value of any Property, is contrary to any requirement of any insurer, constitutes a public or private nuisance, constitutes material waste, violates in any material respect any covenant, condition, agreement or easement applicable to any Property; and (g) Indemnitor shall immediately notify Indemnitee in writing upon becoming aware of any of the following, to the extent not disclosed in any Environmental Report: (i) any Release or threatened Release in, on, under, from or migrating towards any Property; (ii) any non-compliance in any material respect with any Environmental Laws related in any way to any Property; (iii) any actual or potential Environmental Lien; (iv) any required or proposed Remediation relating to any Property; and (v) any written notice from a Governmental Authority relating in any way to (A) Hazardous Substances or Remediatio n thereof, (B) possible liability of any Person pursuant to any Environmental Law in connection with any Property, or (C) any actual or potential administrative or judicial proceedings in connection with anything referred to in this Agreement.

4. Indemnified Rights/Cooperation and Access. In the event that any Indemnified Party, based on a good faith determination, has reason to believe that Indemnitor is not in material compliance with its warranties, covenants and agreements relating to compliance with any Environmental Laws, then (subject to the rights of Tenants), any Indemnified Party may cause an engineer or consultant satisfactory to such Indemnified Party (in the exercise of its reasonable judgment) to conduct an environmental assessment or audit (the scope of which shall be determined in the reasonable judgment of such Indemnified Party) including taking samples of soil, groundwater or other water, air, or b uilding materials or any other testing requested by such Indemnified Party (in the reasonable judgment of such Indemnified Party) and may deliver to the other Indemnified Parties and Indemnitor the results of any such assessment, audit, sampling or other testing. All costs and expenses incurred by any Indemnified Party pursuant to this Section 4 shall be paid by the Indemnified Parties unless (i) the Indemnified Parties have a good faith basis for suspecting that Indemnitor is not in material compliance with its warranties, covenants and agreements relating to compliance with Environmental Laws, or (ii) an Event of Default exists (or is discovered as a result of any such environmental assessment or audit), in which case the reasonable third party fees and expenses relating to such environmental assessment or audit shall be paid by Indemnitor within the Demand Period. Indemnitor shall cooperate with and provide any Indemnified Party and any such person designated by such Indemnified Part y with access to such Property, subject to the rights of Tenants. Indemnitor covenants and agrees, at its sole cost and expense, to protect, defend, indemnify, release and hold Indemnified Parties harmless from and against any and all Losses imposed upon or incurred by or asserted against any Indemnified Parties and directly or indirectly arising out of or in any way relating to any one or more of the following: (a) any presence of any Hazardous Substances in, on, above or under any Property; (b) any past, present or threatened Release in, on, above, under or from any Property; (c) any actual, proposed or threatened use, treatment, storage, holding, existence, disposition or other Release, generation, production, manufacturing, processing, refining, control, management, abatement, removal, handling, transfer or transportation of any Hazardous Substances on any Property; (d) any actual or proposed Remediation at any time in, under, on or above any Property; (e) any past, present or threatened non-c ompliance or violations of any Environmental Laws (or permits issued pursuant to any Environmental Law) in connection with any Property or operations thereon, including any failure by Indemnitor, any other Borrower Party, and/or any Tenant or other user of any Property to comply with any order of any Governmental Authority in connection with any Environmental Laws; (f) the imposition, recording or filing, or the threatened imposition, recording or filing, of any Environmental Lien encumbering any Property; (g) any administrative processes or proceedings or judicial proceedings in any way connected with any matter addressed in this Agreement concerning Hazardous Substances; (h) any past, present or threatened injury to, destruction of or loss of natural resources in any way connected with any Property, including costs to investigate and assess Losses; (i) any acts of Indemnitor, any other Borrower Party, and/or any Tenant or other user of any Property in arranging for disposal or treatment, or arranging with a transporter for transport for disposal or treatment, of Hazardous Substances directly or indirectly affecting any Property, at any facility or incineration vessel containing Hazardous Substances; (j) any acts of Indemnitor, any other Borrower Party, and/or any Tenant or other user of any Property in accepting any Hazardous Substances affecting such Property for transport to disposal or treatment facilities, incineration vessels or sites from which there is a Release, or a threatened Release of any Hazardous Substance which causes the incurrence of costs for Remediation; (k) any personal injury, wrongful death, or property or other damage arising under any statutory or common law or tort law theory, including damages assessed for private or public nuisance or for the conducting of an abnormally dangerous activity on or near any Property; and (l) any misrepresentation set forth in this Agreement or the Loan Agreement or any breach or failure to perform any warranty, covenant or other obligations pursuant to this Agreement, the Loan Agreement, the Note or the Mortgage concerning Hazardous Substances. Nothing contained in this Section 4 shall be deemed to indemnify the Indemnified Parties for their own gross negligence or willful misconduct. Any Indemnified Party performing any environmental assessment or audit under this Agreement shall be responsible, at such Indemnified Party’s cost and expense, to promptly restore any applicable Property to the condition that existed prior to such environmental assessment or audit as a result of any damage caused by the gross negligence or willful misconduct of such Indemnified Party.

5. Duty to Defend and Attorneys and Other Fees and Expenses. Upon written request by any Indemnified Party, Indemnitor shall defend itself and Indemnified Parties (if requested by any Indemnified Party, in the name of the Indemnified Party) by attorneys and other professionals approved by the Indemnified Parties (such approval not to be unreasonably withheld) from and against any action, suit, claim, demand, dispute or proceeding (collectively, an “Enforcement Action”) arising or in any way connected, whether directly or indirectly, to any actual or alleged violation of the representations, warranties and coven ants in Sections 2 and 3. Notwithstanding the foregoing, if (i) such Enforcement Action involves the possible imposition of criminal liability on the Indemnified Parties, (ii) the assumption or control by Indemnitor of the defense of such Enforcement Action, in the reasonable discretion of the Indemnified Parties, involves a conflict of interest between the Indemnitor and the Indemnified Parties with respect to such action or proceeding, or (iii) the Indemnitor or the attorneys engaged by Indemnitor have, in the reasonable determination of the Indemnified Parties, taken action or failed to take action which has prejudiced the defense of the Indemnified Parties or have failed to pursue with reasonable diligence such defense or the negotiation or settlement of such defense, then Indemnitor shall be responsible for all of the costs and expenses of the Indemnified Parties in respect of such defense of the Enforcement Action and shall pay on demand or, in the sole and absolute discretion of the Indemni fied Parties, reimburse the Indemnified Parties for payments made, for all reasonable fees and disbursements of attorneys, engineers, environmental consultants, laboratories and other professionals engaged by and/or on behalf of Indemnified Parties. Indemnitor may not compromise or settle any such Enforcement Action without the consent of Indemnitee (which consent may be issued or withheld in Indemnitee’s judgment) unless the claimant agrees as part of the compromise or settlement that the Indemnified Parties shall have no responsibility or liability for the payment or discharge of any amount agreed upon or other obligation to take any other action or any other exposure to liability to such claimant. Notwithstanding the foregoing and at the option of Indemnified Parties, if Indemnified Parties engage their own attorneys to defend them from and against, or assist them in, any Enforcement Action, such Indemnified Parties and their attorneys shall control the resolution of any Enforc ement Action as to themselves, provided that no compromise or settlement shall be entered without Indemnitor's consent (which consent shall not be unreasonably withheld). Within the Demand Period, Indemnitor shall pay or, in the discretion of the Indemnified Parties, reimburse the Indemnified Parties for payments made, for all reasonable fees and disbursements of attorneys, engineers, environmental consultants, laboratories and other professionals engaged by and/or on behalf of Indemnified Parties in accordance with the provisions of this Section 5.

6. Unimpaired Liability. The liability of Indemnitor under this Agreement shall in no way be limited or impaired by, and Indemnitor hereby consents to and agrees to be bound by, any amendment or modification of the provisions of the Loan Agreement, the Note, the Mortgage or any of the other Loan Documents. In addition, the liability of Indemnitor under this Agreement shall in no way be limited or impaired by (a) any extensions of time for performance required by the Loan Agreement, the Note, the Mortgage or any of the other Loan Documents, (b) any sale or transfer of all or part of any Property, whether following foreclosure of the Mortgage or otherwise, (c) any excu lpatory provision in the Note, the Mortgage, or any of the other Loan Documents otherwise limiting Indemnitee's recourse to any Property or to any other security for the Obligations, or limiting Indemnitee's rights to a deficiency judgment against Indemnitor, (d) the accuracy or inaccuracy of the representations and warranties made by Indemnitor under the Loan Agreement, the Note, the Mortgage or any of the other Loan Documents or by Indemnitor herein, (e) the release, waiver or discharge of any Indemnitor or any other Person from performance or observance of any of the agreements, covenants, terms or condition contained in any of the other Loan Documents by operation of law, Indemnitee's voluntary act, or otherwise, (f) the release or substitution in whole or in part of any security for the Obligations, (g) Indemnitee's failure to record the Mortgage or file any UCC financing statements (or Indemnitee's improper recording or filing of any thereof) or to otherwise perfect, protect, secure or insure any secur ity interest or lien given as security for the Obligations, (h) any exercise or non-exercise by Indemnitee of any right or privilege under this Agreement or any of the other Loan Documents, or (i) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Indemnitor or any Affiliate of any Indemnitor, or any action by any trustee or receiver or by any court in any such proceeding; and, in any such case, whether with or without notice to Indemnitor and with or without consideration.

7. Enforcement.

(a) Indemnified Parties may enforce the obligations of Indemnitor under this Agreement without first resorting to, or exhausting any security or collateral under, or without first having recourse pursuant to, the Loan Agreement, the Note, the Mortgage, or any of the other Loan Documents or any Property, through foreclosure proceedings or otherwise, provided, however, that nothing herein shall inhibit or prevent Indemnitee from suing on the Note, foreclosing, or exercising any power of sale under, the Mortgage, or exercising any other rights and remedies thereunder. This Agreement is not collateral or security for the Obligations, un less Indemnitee expressly elects in writing to make this Agreement additional collateral or security for the Obligations, which Indemnitee is entitled to do in its discretion. It is not necessary for a Potential Default or an Event of Default to have occurred for Indemnified Parties to exercise their rights pursuant to this Agreement. Notwithstanding any provision of the Loan Agreement, the Note, the Mortgage or any other Loan Document, the obligations pursuant to this Agreement are exceptions to any non-recourse or exculpation provision of the Loan Documents (including the terms and conditions set forth in Article 10 of the Loan Agreement) and Indemnitor is fully and personally liable for such obligations, and such liability is not limited to the original or amortized principal balance of the Loan or the value of any Property.

(b) Without limiting any of the remedies provided in the Loan Documents, Indemnitor acknowledges and agrees that the provisions hereof are environmental provisions (as defined in Section 736(f)(2) of the California Code of Civil Procedure) made by Indemnitor relating to the real property security (the “Environmental Provisions”). Indemnitor’s breach of or a failure to comply with the Environmental Provisions shall constitute a breach of contract entitling Indemnitee to all remedies provided under Section 736 of the California Code of Civil Procedure (“Section 736”) for the recovery of damages and for the enforcement of t he Environmental Provisions. Pursuant to Section 736, Indemnitee’s action for recovery of damages or enforcement of the Environmental Provisions shall not constitute an action within the meaning of Section 726(a) of the California Code of Civil Procedure or constitute a money judgment for a deficiency or a deficiency judgment within the meaning of Section 580a, 580b, 580d, or 726(b) of the California Code of Civil Procedure. Other than the remedy provided under Section 736, all remedies provided for by the Loan Documents are separate and distinct causes of action that are not abrogated, modified, limited or otherwise affected by the remedies provided under Section 736(a) of the California Code of Civil Procedure.

8. Survival. The obligations and liabilities of Indemnitor under this Agreement shall fully survive indefinitely notwithstanding any termination, satisfaction, assignment, entry of a judgment of foreclosure, exercise of any power of sale, or delivery of a deed in lieu of foreclosure of the Mortgage.

9. Amounts Payable; Interest. Any amounts payable to any Indemnified Parties under this Agreement shall become due and payable within the Demand Period, and shall bear interest at the Default Rate from the expiration of the Demand Period until paid in full. Wherever pursuant to this Agreement it is provided that Indemnitor pay any costs and expenses, such costs and expenses shall include legal fees and disbursements of Indemnified Parties and shall include reimbursements for the expenses of the in-house staff.

10. Waivers. Indemnitor hereby: (i) waives any right or claim of right to cause a marshaling of Indemnitor's assets or to cause Indemnitee or other Indemnified Parties to proceed against any of the security for the Loan before proceeding under this Agreement against Indemnitor; (ii) relinquishes all rights and remedies accorded by law to indemnitors or guarantors, except any rights of subrogation which Indemnitor may have, provided that the indemnity provided for hereunder shall neither be contingent upon the existence of any such rights of subrogation nor subject to any claims or defenses whatsoever which may be asserted in connection with the enforcement or attempted enforcem ent of such subrogation rights including any claim that such subrogation rights were abrogated by any acts of Indemnitee or other Indemnified Parties; (iii) waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against or by Indemnitee or other Indemnified Parties; (iv) waives notice of acceptance hereof and of any action taken or omitted in reliance hereon; (v) waives presentment for payment, demand of payment, protest or notice of nonpayment or failure to perform or observe, or other proof, or notice or demand; and (vi) waives all homestead exemption rights against the obligations hereunder and the benefits of any statutes of limitations or repose. Notwithstanding anything to the contrary contained herein, Indemnitor hereby agrees to postpone the exercise of any rights of subrogation with respect to any collateral securing the Obligations until the Obligations shall have been fully and finally paid.

11. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, INDEMNITOR AND INDEMNITEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OR ANY EXERCISE OF THEIR RESPECTIVE RIGHTS UNDER THIS AGREEMENT OR THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE LOAN OR ANY PROPERTY (INCLUDING ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND ANY CLAIM OR DEFENSE ASSERTING T HAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR INDEMNITEE TO ENTER THIS AGREEMENT.

12. Subrogation. Indemnitor shall take any and all reasonable actions, including institution of legal action against third parties, necessary or appropriate to obtain reimbursement, payment or compensation from such persons responsible for the presence of any Hazardous Substances at, in, on, under, above or near any Property or otherwise obligated by law to bear the cost. Indemnified Parties shall be and hereby are subrogated to all of Indemnitor's rights now or hereafter in such claims.

13. Indemnitor's Representations and Warranties. Each Indemnitor represents and warrants to and for the benefit of Indemnified Parties that:

(a) it has the full power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and the execution, delivery and performance of this Agreement by Indemnitor has been duly and validly authorized and all requisite action has been taken by Indemnitor to make this Agreement valid and binding upon Indemnitor, and enforceable in accordance with its terms;

(b) its execution of, and compliance with, this Agreement is in the ordinary course of business of Indemnitor and will not result in the breach of any term or provision of the charter, by-laws, partnership or trust agreement, or other governing instrument of Indemnitor or result in the breach of any term or provision of, or conflict with or constitute a default under, or result in the acceleration of any obligation under, any agreement, indenture or loan or credit agreement or other instrument to which Indemnitor or any Property is subject, or result in the violation of any law, rule, regulation, order, judgment or decree to which Indemnitor or any Property is subject;

(c) there is no action, suit, proceeding or investigation pending or, to Indemnitor's knowledge, threatened against it which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of Indemnitor, or in any material impairment of the right or ability of Indemnitor to carry on its business substantially as now conducted, or in any material liability on the part of Indemnitor, or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of Indemnitor contemplated herein, or which would be likely to impair materially the ability of Indemnitor to perform under the terms of this Agreement;< /div>

(d) it does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement;

(e) no approval, authorization, order, license or consent of, or registration or filing with, any governmental authority or other person, and no approval, authorization or consent of any other party is required in connection with this Agreement; and

(f) this Agreement constitutes a valid, legal and binding obligation of Indemnitor, enforceable against it in accordance with the terms hereof, subject only to applicable bankruptcy, insolvency and similar laws affecting the rights of creditors generally and subject, as to enforceability, to general principles of equity.

14. No Waiver. No course of dealing on the part of any Indemnified Party, nor any failure or delay by any Indemnified Party with respect to exercising any right, power or privilege of any Indemnified Party pursuant to this Agreement or any of the other Loan Documents, shall operate as a waiver thereof.

15. Notice of Legal Actions. Each party hereto shall, within five (5) Business Days of receipt thereof, give written notice to the other party hereto of (a) any notice, advice or other communication from any Governmental Authority or any source whatsoever with respect to Hazardous Substances on, from or affecting any Property, and (b) any legal action brought against such party or related to any Property, with respect to which Indemnitor may have liability under this Agreement. Such notice shall comply with the provisions of Section 18.

16. Transfer of Loan. Indemnitee may, at any time, sell, transfer or assign the Note, the Loan Agreement, the Mortgage, this Agreement and the other Loan Documents, and any or all servicing rights with respect thereto, or grant participations therein or issue mortgage pass-through certificates. Indemnitee may forward to each Investor and each prospective Investor and any servicer, all documents and information which Indemnitee now has or may hereafter acquire relating to Indemnitor and any Property, whether furnished by Indemnitor, any guarantor or otherwise, as Indemnitee determines necessary or desirable. Indemnitor agrees to cooperate, and agrees to cau se any guarantor to cooperate, with Indemnitee in connection with any transfer made pursuant to this Section 16, including the delivery of an estoppel certificate and such other documents as may be reasonably requested by Indemnitee. Indemnitor shall also furnish, and Indemnitor hereby consents to Indemnitee furnishing to such Investors, such prospective Investors or any servicer, any and all information concerning the financial condition of Indemnitor and any and all information concerning each Property and the Leases as may be requested by Indemnitee, any servicer, any Investor or any prospective Investor in connection with any outsourcing of servicing, sale, transfer or participation interest. No exercise by Indemnitee of any transfer rights pursuant to the Loan Documents shall operate to release or diminish the duties, obligations or liabilities of Indemnitor under this Agreement unless any such release is expressly granted in writing by Indemnitee.

17. Discretion of Indemnified Parties. Wherever pursuant to this Agreement (i) Indemnitee (or Indemnified Parties) exercises its judgment, or any right given to it, to approve or disapprove any item, matter or course of conduct, (ii) any arrangement or term is to be satisfactory to Indemnitee (or Indemnified Parties), or (iii) any other decision or determination is to be made by Indemnitee (of Indemnified Parties), the decision of Indemnitee to approve or disapprove, the exercise of its judgment or discretion, all decisions that arrangements, items, course of conduct or terms are satisfactory or not satisfactory and all other decisions and determinations made by Indemnitee, sha ll be in the sole and absolute discretion of Indemnitee and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein.

18. Notices. All notices or other written communications hereunder shall be made in accordance with Section 9.1 of the Loan Agreement.

19. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder.

20. No Oral Change; Entire Agreement. This Agreement, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Indemnitor or any Indemnified Party. Any such modification, amendment, waiver, extension, change, discharge or termination shall only be effective by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. This Agreem ent is, and shall be construed to be, in addition to (and not in lieu of) any and all other duties, responsibilities, obligations and/or liability which Indemnitor may have to any of Indemnified Parties pursuant to the other Loan Documents or otherwise. To the extent, if any that the terms and conditions of this Agreement conflict with the terms and conditions of any of the other Loan Documents, the terms and conditions imposing the broader duties, responsibilities, obligations and/or liability on Indemnitor shall prevail.

21. Headings, Etc. The headings and captions of various paragraphs of this Agreement are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof.

22. Number and Gender/Successors and Assigns; Joint and Several. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or persons referred to may require. Without limiting the effect of specific references in any provision of this Agreement, the term “Indemnitor” shall be deemed to refer to each and every person comprising an Indemnitor from time to time, as the sense of a particular provision may require, and to include the heirs, executors, administrators, legal representatives, successors and assigns of Indemnitor, all of whom shall be bound by the provisions of this Agreement, provided that no obligation of Indemnitor may be assigned except with the written consent of Indemnitee (which may be granted or withheld in Indemnitee's sole and absolute discretion). Each reference herein to “Indemnitee” shall be deemed to include its successors and assigns. This Agreement shall inure to the benefit of Indemnified Parties and their respective successors and assigns forever. If Indemnitor consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several.

23. Rights Cumulative. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies which Indemnitee has under the Loan Agreement, the Note, the Mortgage or the other Loan Documents or would otherwise have at law or in equity.

24. Inapplicable Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision shall be fully severable; the Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; the remaining provisions thereof shall remain in full effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom; and in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible to be legal, valid and enforceable.

25. Governing Law. This Agreement shall be governed in accordance with the terms and provisions of the laws of the State of California.

[Remainder of this page intentionally left blank. Signature page follows.]

IN WITNESS WHEREOF, this Agreement has been executed by Indemnitor and is effective as of the day and year first above written.

BORROWER:

MISSION WEST PROPERTIES, L.P.,

MISSION WEST PROPERTIES, L.P. I,

MISSION WEST PROPERTIES, L.P. II,

MISSION WEST PROPERTIES, L.P. III,

each a Delaware limited partnership

By: Mission West Properties, Inc.

a Maryland corporation

its general partner

By: /s/ Raymond V. Marino

Name: Raymond V. Marino

Title: President & COO

CARVEOUT GUARANTOR:

MISSION WEST PROPERTIES, INC.,

a Maryland corporation

By: /s/ Raymond V. Marino

Name: Raymond V. Marino

Title: President & COO

[Signature Page to Environmental Indemnity Agreement]

CALIFORNIA ALL-PURPOSE ACKNOWLEDGEMENT

File No:

STATE OF

California

)SS

APN No:

COUNTY OF

)

before me,

, Notary Public, personally appeared

who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature

This area for official notarial seal.

OPTIONAL SECTION

CAPACITY CLAIMED BY SIGNER

Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the documents.

INDIVIDUAL

CORPORATE OFFICER(S) TITLE(S)

PARTNER(S)

LIMITED

GENERAL

ATTORNEY-IN-FACT

TRUSTEE(S)

GUARDIAN/CONSERVATOR

OTHER

SIGNER IS REPRESENTING:

Name of Person or Entity

OPTIONAL SECTION

Though the data requested here is not required by law, it could prevent fraudulent reattachment of this form.

THIS CERTIFICATE MUST BE ATTACHED TO THE DOCUMENT DESCRIBED BELOW

TITLE OR TYPE OF DOCUMENT:

NUMBER OF PAGES

DATE OF DOCUMENT

SIGNER(S) OTHER THAN NAMED ABOVE

Reproduced by First American Title Insurance Company National Commercial Services 11/2007

[Acknowledgment Page to Environmental Indemnity Agreement]

CALIFORNIA ALL-PURPOSE ACKNOWLEDGEMENT

File No:

STATE OF

California

)SS

APN No:

COUNTY OF

)

before me,

, Notary Public, personally appeared

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature

This area for official notarial seal.

OPTIONAL SECTION

CAPACITY CLAIMED BY SIGNER

Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the documents.

INDIVIDUAL

CORPORATE OFFICER(S) TITLE(S)

PARTNER(S)

LIMITED

GENERAL

ATTORNEY-IN-FACT

TRUSTEE(S)

GUARDIAN/CONSERVATOR

OTHER

SIGNER IS REPRESENTING:

Name of Person or Entity

OPTIONAL SECTION

Though the data requested here is not required by law, it could prevent fraudulent reattachment of this form.

THIS CERTIFICATE MUST BE ATTACHED TO THE DOCUMENT DESCRIBED BELOW

TITLE OR TYPE OF DOCUMENT:

NUMBER OF PAGES

DATE OF DOCUMENT

SIGNER(S) OTHER THAN NAMED ABOVE

Reproduced by First American Title Insurance Company National Commercial Services 11/2007

[Acknowledgment Page to Environmental Indemnity Agreement]

EXHIBIT A-1 – A-12

LEGAL DESCRIPTION

EXHIBIT B

LIST OF ENVIRONMENTAL REPORTS

CONFIDENTIAL TREATMENT - THE LIST OF ENVIRONMENTAL REPORTS ARE OMITTED

[Acknowledgment Page to Environmental Indemnity Agreement]

EX-10.54 4 exh10_54.htm LOAN MODIFICATION AGREEMENT exh10_54.htm

EXHIBIT 10.54

WHEN RECORDED RETURN TO:

Blackwell Sanders Peper Martin LLP

4801 Main Street, Suite 1000

Kansas City, Missouri 64112

Attn: Gaylord G. Smith

LOAN MODIFICATION AGREEMENT

THIS LOAN MODIFICATION AGREEMENT (this “Agreement”) is made as of the 26th day of July, 2005, by and between MISSION WEST PROPERTIES, L.P., a Delaware limited partnership, whose address is 10050 Bandley Drive, Cupertino, California 95014 (“Borrower”), and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation, whose address is c/o Allianz of America, Inc., 55 Greens Farms Road, Post Office Box 5160, Westport, Connecticut, 06881-5160, Attn: Real Estate Department (“Lender”).

WITNESSETH:

WHEREAS, Lender has made a mortgage loan in the amount of $25,800,000.00 (the “Loan”) to Borrower, as evidenced by a Secured Installment Note in the amount of the Loan dated April 6, 2005 (the “Note”); and

WHEREAS, the Loan is secured by Deed of Trust, Security Agreement, Fixture Filing with Absolute Assignment of Rents dated April 6, 2005, granted by Borrower for the benefit of Lender, and recorded on April 6, 2005, as Document No. 18305259 (the “Deed of Trust”), and by an Absolute Assignment of Leases, Rents and Income dated April 6, 2005, given by Borrower to Lender, and recorded on April 6, 2005, as Document No. 10305260 (the “Assignment”), encumbering the “Property,” as defined in the Deed of Trust, including the real property described on Exhibit A, attached hereto (the Note, Deed of Trust, Assignment, and all other documents or instruments evidencing or securing the Loan are hereinafter referred to as the “Security Documents”); and

WHEREAS, certain obligations of Borrower under the Loan have been guaranteed by Mission West Properties, Inc. (“Guarantor”) pursuant to a Limited Guaranty dated April 6, 2005 (the “Guaranty”); and

WHEREAS, Lender has agreed to make a new loan to Borrower and Mission West Properties I, L.P., in the amount of $125,000,000.00, to be secured by certain real property in Santa Clara County, California (the “New Loan”); and

WHEREAS, Lender has agreed to make the New Loan on the condition that Borrower modify the Deed of Trust to provide that a default by Borrower under the New Loan will constitute a default under the Deed of Trust and the Loan; and

WHEREAS, Borrower has agreed to Lender’s conditions for the New Loan and Lender and Borrower have agreed to amend the Security Documents as hereinafter set forth.

NOW, THEREFORE, in consideration of the agreement of Lender to make the New Loan, and of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower hereby agree as follows:

1. Amendment of Note. The Note is hereby amended by deleting therefrom Paragraph 1 in its entirety and by substituting the following therefor:

1. Payment. Said principal sum, and interest as herein provided to accrue on the unpaid principal, shall be paid as follows:

(a) On August 10, 2005, Borrower shall make a payment of principal and interest in the amount of $178,351.00.

(b) On each “Payment Date” to and including July 10, 2025, payments of principal and interest in the amount of $176,713.00 shall be due and payable. “Payment Date” means the tenth (10th) day of each consecutive calendar month for the term of this Note commencing September 10, 2005. The payments due under this subparagraph (b) are each called a “Monthly Installment.”

(c) The entire remaining principal amount, together with any accrued and unpaid interest (the “Final Installment”), shall be due and payable in full on August 10, 2025 (the “Maturity Date”).

(d) Interest shall be computed on the basis of a three hundred sixty (360) day year consisting of twelve (12) months of thirty (30) days each.

2. Amendment of Deed of Trust. (a) Section 1.13 of the Deed of Trust is hereby deleted in its entirety and the following is substituted therefor:

1.13 Financial Statements/Records. Borrower shall deliver or cause to be delivered to Lender, within ninety (90) days after the end of each of the respective party’s fiscal years, (i) an annual operating statement of income and expenses (which shall be audited if an Event of Default exists) with respect to the operation of the Property, in reasonable detail and certified by the chief financial officer or manager of Borrower as complete and correct in all material respects, (ii) a financial statement of Mission West Properties, Inc., a Maryland corporation, the general partner of Borrower (“Principal”) (which shal l be audited if an Event of Default exists), prepared in accordance with generally accepted accounting principles, consistently applied, and certified as complete and correct in all material respects by the chief financial officer of Principal, and (iii) financial statements of all tenants under leases of the Property, if available according to such leases. Borrower agrees to keep adequate books and records of account, and shall permit Lender, and its agents, accountants and attorneys, upon reasonable prior notice, to visit and inspect the Property and examine the Property’s books and records of account at Borrower’s office during normal business hours, and to discuss the Property’s affairs, finances and accounts with Borrower, at such reasonable times as Lender may request. Such statements shall be prepared in a form acceptable to Lender, to include, without limitation, a current leasing summary (which shall disclose, among other things, names of tenants, square footage of leased area, commencement dates and expiration dates of the leases as well as concessions granted to Lessees), gross rental income, other income, real estate taxes, insurance, operating expenses and depreciation deduction accompanied by financial statements received by Borrower from tenants. If the operating statements for the Property provided by Borrower are not in a form acceptable to Lender or Borrower fails to furnish such statements and reports, Lender shall have the right to audit the respective books and records of the Property at the expense of Borrower and if Borrower prevents Lender from conducting such audit, Lender may at the election of Lender declare this Deed of Trust in default.

(b) Section 4.1 of the Deed of Trust is hereby amended by adding thereto the following new subparagraph (h):

(h) There shall exist an “Event of Default” under that certain Deed of Trust, Security Agreement, Fixture Filing with Absolute Assignment of Rents dated July 26, 2005, granted by Mission West Properties, L.P. and Mission West Properties, L.P. I, d/b/a Mission West Properties I, L.P., for the benefit of Lender, and recorded July ___, 2005, as Instrument Number _____________, in the Records of Santa Clara County, California, or under the Note secured by said Deed of Trust, or under any other “Security Documents” as defined in said Deed of Trust.

3. Security Documents to Continue in Effect. Except as herein modified and amended, the Note, Deed of Trust and all Security Documents shall continue in full force and effect in accordance with their terms.

4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. In the event that any provision or clause of this Agreement conflicts with applicable law, such conflicts shall not affect other provisions of this Agreement which can be given effect without the conflict provisions and to this end the provisions of this Agreement are declared to be severable.

5. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the transactions set forth herein. This Agreement may only be modified or amended in writing by an agreement executed by all parties hereto.

6. Headings. The headings used herein are for convenience only and are not to be used in interpreting this Agreement.

7. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original, and all of which shall constitute the complete Agreement. One complete, original Agreement shall be attached to the Note, and one complete, original Agreement shall be recorded in the Records of Santa Clara County, California.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Borrower and Lender have executed this Loan Modification Agreement as of the day and year first above written.

MISSION WEST PROPERTIES, L.P.,

a Delaware limited partnership

By:

Mission West Properties, Inc., a Maryland corporation, General Partner

By: /s/ Carl E. Berg

Name: Carl E. Berg

Title: Chief Executive Officer

ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA,

a Minnesota corporation

By: /s/ Gary Brown

Name: Gary Brown

Title: Assistant Treasurer

By: /s/ Pamela J. Cornell

Name: Pamela J. Cornell

Title: Assistant Treasurer

CONSENT OF GUARANTOR

The below entity, as “Guarantor” under the Guaranty with respect to the Loan described in the foregoing Agreement, hereby consents to the terms and provisions of the foregoing Agreement, and hereby ratifies and confirms said Agreement, and declares that the terms of the Guaranty, and the liabilities and obligations of the Guarantor thereunder shall be and continue to be in full force and effect with respect to the Loan and the Security Documents, as modified and amended by the foregoing Agreement.

MISSION WEST PROPERTIES, INC.,

a Maryland corporation

By: /s/ Carl E. Berg

Name: Carl E. Berg

Title: Chief Executive Officer

EXHIBIT A

Legal Description

Real property in the City of San Jose, County of Santa Clara, State of California, described as follows:

PARCEL A:

ALL THAT PROPERTY DESCRIBED AS PARCEL FOUR, IN THAT CERTAIN LOT LINE ADJUSTMENT PERMIT RECORDED, FEBRUARY 22, 2001 AS DOCUMENT NO. 15567588, SANTA CLARA COUNTY RECORDS AND FURTHER DESCRIBED AS FOLLOWS:

A PORTION OF LOT 5, AS SAID LOT IS SHOWN UPON THAT CERTAIN MAP ENTITLED, “MAP OF THE E. M. PIERCY SUBDIVISION NO. 1”, WHICH MAP WAS FILED FOR RECORD IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA ON NOVEMBER 27, 1906 IN BOOK “L” OF MAPS AT PAGE 51, AND BEING DESCRIBED AS FOLLOWS:

BEGINNING AT THE MOST WESTERLY CORNER OF LOT 5, IN THE CENTERLINE OF PIERCY ROAD, 40 FEET WIDE, AS SAID LOT AND ROAD ARE SHOWN UPON THE SAID MAP OF THE E. M. PIERCY SUBDIVISION; THENCE LEAVING THE CENTER LINE OF PIERCY ROAD AND RUNNING ALONG THE SOUTHWESTERLY LINE OF SAID LOT 5, SOUTH 30° EAST 1184.77 FEET TO THE MOST WESTERLY CORNER OF THAT CERTAIN 2.49 ACRE PARCEL OF LAND CONVEYED IN THE DEED FROM J. C. LENT ET UX, TO SANTA CLARA VALLEY WATER CONSERVATION DISTRICT, DATED APRIL 6, 1960 AND RECORDED APRIL 7, 1960 IN BOOK 4756 OF OFFICIAL RECORDS, PAGE 193, SANTA CLARA COUNTY RECORDS; THENCE LEAVING THE SOUTHWESTERLY LINE OF LOT 5 AND RUNNING ALONG THE NORTHWESTERLY LINE OF SAID 2.49 ACRE PARCEL OF LAND HEREINABOVE REFERRED TO, THE FOLLOWING TWO COURSES AND DISTANCES; NORTH 35°51’ EAST 467.24 FEET AND NORTH 26°14’30” EAST 44.17 FEET TO THE MOST NORTHERLY CORNER OF SAID 2.49 ACRE PARCEL OF LAND IN THE NORTHEASTERLY LINE OF SAID LOT 5; THENCE RUNNING ALONG THE NORTHEASTERLY LINE OF LOT 5, NORTH 45° WEST 1054.33 FEET TO THE MOST NORTHERLY CORNER OF SAID LOT 5 IN THE CENTER LINE OF SAID PIERCY ROAD; THENCE RUNNING ALONG THE CENTER LINE OF SAID PIERCY ROAD, SOUTH 45° WEST 198.00 FEET TO THE POINT OF BEGINNING AND BEING A PORTION OF LOT 5, AS THE SAME IS LAID OUT, DESIGNATED AND DELINEATED UPON A CERTAIN MAP ENTITLED, “MAP OF THE E. M. PIERCY SUBDIVISION NO. 1” OF LOT 2 OF THE PIERCY PARTITION (CASE 8230) IN THE SUPERIOR COURT IN AND FOR SANTA CLARA COUNTY, STATE OF CALIFORNIA, IN THE RANCHO YERBA BUENA Y. SOCAYRE, SURVEYED SEPTEMBER AND OCTOBER 1906 BY CHARLES HERMANN OF HERMANN BROS., SURVEYORS AND C. E. SAN JOSE, CAL.”, AND WHICH MAP WAS FILED FOR RECORD IN THE OFFICE OF THE COUNTY RECORDER OF SANTA CLARA COUNTY O N NOVEMBER 27, 1906 IN BOOK “L” OF MAPS, AT PAGE 51.

TOGETHER WITH THE FOLLOWING DESCRIBED TRANSFER PARCEL E: BEGINNING AT THE ANGLE POINT IN THE NORTHWESTERLY LINE OF LOT 4, ALSO BEING THE ANGLE POINT IN THE CENTERLINE OF PIERCY ROAD, 40 FEET WIDE, AS SAID LOT AND ROAD ARE SHOWN UPON SAID MAP; THENCE WEST 173.82 FEET ALONG SAID CENTERLINE TO THE TRUE POINT OF BEGINNING; THENCE SOUTH 0°01’44” EAST 298.10 FEET; THENCE SOUTHEASTERLY ALONG A TANGENT CURVE TO THE LEFT WITH A RADIUS OF 150.00 FEET THROUGH A CENTRAL ANGLE OF 45°01’41” FOR AN ARC LENGTH OF 117.88 FEET; THENCE SOUTH 44°59’58” EAST 278.19 FEET TO THE EASTERLY LINE OF SAID LOT 3; THENCE NORTH 14°00’00” WEST 619.36 FEET TO SAID CENTERLINE OF PIERCY ROAD; THENCE WEST 90.66 FEET ALONG SAID CENTERLINE SAID TRUE POINT OF BEGINNING.

ALSO TOGETHER WITH THE FOLLOWING DESCRIBED TRANSFER PARCEL G: BEGINNING AT THE ANGLE POINT IN THE NORTHWESTERLY LINE OF LOT 4, ALSO BEING THE ANGLE POINT IN THE CENTERLINE OF PIERCY ROAD, 40 FEET WIDE, AS SAID LOT AND ROAD ARE SHOWN UPON SAID MAP; THENCE WEST 173.82 FEET ALONG SAID CENTERLINE; THENCE SOUTH 0°01’44” EAST 298.10 FEET; THENCE SOUTHEASTERLY ALONG A TANGENT CURVE TO THE LEFT WITH A RADIUS OF 150.00 FEET THROUGH A CENTRAL ANGLE OF 45°01’41” FOR AN ARC LENGTH OF 117.88 FEET; THENCE SOUTH 44°59’58” EAST 278.19 FEET TO THE EASTERLY LINE OF SAID LOT 3 AND THE TRUE POINT OF BEGINNING; THENCE NORTH 14°00’00” WEST 619.36 FEET TO SAID CENTERLINE OF PIERCY ROAD; THENCE EASTERLY AND NORTHEASTERLY ALONG SAID CENTERLINE EAST 83.16 FEET AND NORTH 45°00’00 ” EAST 174.24 FEET TO THE MOST NORTHERLY CORNER OF SAID LOT 4; THENCE SOUTH 30°00’00” EAST 694.69 FEET ALONG THE NORTHEASTERLY LINE OF SAID LOT 4; THENCE LEAVING SAID NORTHEASTERLY LINE SOUTH 65°45’38” WEST 398.08 FEET TO A POINT WHICH BEARS SOUTH 44°59’58” EAST 57.82 FEET FROM SAID TRUE POINT OF BEGINNING; THENCE NORTH 44°59’58” WEST 57.82 FEET TO SAID TRUE POINT OF BEGINNING.

EXCEPTING THEREFROM THE FOLLOWING DESCRIBED TRANSFER PARCEL F: COMMENCING AT THE MOST WESTERLY CORNER OF LOT 5, IN THE CENTERLINE OF PIERCY ROAD, 40 FEET WIDE, AS SAID LOT AND ROAD ARE SHOWN UPON SAID MAP; THENCE LEAVING THE CENTER LINE OF PIERCY ROAD AND RUNNING ALONG THE

SOUTHWESTERLY LINE OF SAID LOT 5, SOUTH 30° EAST 694.69 FEET TO THE TRUE POINT OF BEGINNING; THENCE CONTINUING SOUTH 30° EAST 490.08 FEET TO THE MOST WESTERLY CORNER OF THAT CERTAIN 2.49 ACRE PARCEL OF LAND CONVEYED IN THE DEED FROM J. C. LENT ET UX, TO SANTA CLARA VALLEY WATER CONSERVATION DISTRICT, DATED APRIL 6, 1960 AND RECORDED APRIL 7, 1960 IN BOOK 4756 OF OFFICIAL RECORDS, PAGE 193, SANTA CLARA COUNTY RECORDS; THENCE LEAVING THE SOUTHWESTERLY LINE OF LOT 5 AND RUNNING ALONG THE NORTHWESTERLY LINE OF SAID 2.49 ACRE PARCEL OF LAND HEREINABOVE REFERRED TO, THE FOLLOWING TWO COURSES AND DISTANCES; NORTH 35°51’00” EAST 467.24 FEET AND NORTH 26°14’30” EAST 44.17 FEET TO THE MOST NORTHERLY CORNER OF SAID 2.49 ACRE PARCEL OF LAND IN THE NORTHEASTERLY LINE OF SAID LOT 5; THENCE RUNNING ALONG THE NORTHEASTERLY LINE OF LOT 5, NORTH 45° WEST 349.56 FEET; THENCE LEAVING SAID NORTHEASTERLY LINE SOUTH 45°00’03” WEST 283.12 FEET; THENCE SOUTH 65°45’38” WEST 99.62 FEET TO THE TRUE POINT OF BEGINNING.

FURTHER EXCEPTING THEREFROM ALL THOSE PORTIONS OF THE ABOVE DESCRIBED PROPERTY GRANTED TO THE CITY OF SAN JOSE, A MUNICIPAL CORPORATION, ON JUNE 6, 2001, FOR STREET PURPOSES IN THAT CERTAIN GRANT DEED UNDER DOCUMENT NO. 15712299, SANTA CLARA COUNTY RECORDS.

PARCEL B:

TOGETHER WITH AN EASEMENT FOR INGRESS/EGRESS, UTILITIES, AND OVERLAND RELEASE OF STORM WATER; BEING DESCRIBED AS FOLLOWS: BEGINNING AT THE ANGLE POINT IN THE NORTHWESTERLY LINE OF LOT 4, ALSO BEING THE ANGLE POINT IN THE CENTERLINE OF PIERCY ROAD, 40 FEET WIDE, AS SAID LOT AND ROAD ARE SHOWN UPON THAT CERTAIN MAP ENTITLED, “MAP OF THE E. M. PIERCY SUBDIVISION NO. 1” WHICH MAP WAS FILED FOR RECORD IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA ON NOVEMBER 27, 1906 IN BOOK “L” OF MAPS AT PAGE 51; THENCE WEST 193.82 FEET ALONG SAID CENTERLINE TO THE TRUE POINT OF BEGINNING; THENCE SOUTH 0°01’44” WEST 298.09 FEET; THENCE SOUTHEASTERLY ALONG A TANGENT CURVE TO THE LEFT WITH A RADIUS OF 170.00 FEET THROUGH A CENTRA L ANGLE OF 45°01’41” FOR AN ARC DISTANCE OF 133.60 FEET; THENCE SOUTH 44°59’58” EAST 273.57 FEET; THENCE SOUTHERLY ALONG A TANGENT CURVE TO THE RIGHT WITH A RADIUS OF 30.00 FEET THROUGH A CENTRAL ANGLE OF 51°19’04” FOR AN ARC DISTANCE OF 26.87 FEET; THENCE ALONG A REVERSE CURVE TO THE LEFT WITH A RADIUS OF 50.00 FEET THROUGH A CENTRAL ANGLE OF 282°38’08” FOR AN ARC DISTANCE OF 246.65 FEET; THENCE ALONG A REVERSE CURVE TO THE RIGHT WITH A RADIUS OF 30.00 FEET THROUGH A CENTRAL ANGLE OF 51°19’04” FOR AN ARC DISTANCE OF 26.87 FEET; THENCE NORTH 44°59’58” WEST 273.57 FEET; THENCE NORTHWESTERLY ALONG A TANGENT CURVE TO THE RIGHT WITH A RADIUS OF 130.00 FEET THROUGH A CENTRAL ANGLE OF 45°01’41” FOR AN ARC DISTANCE OF 102.17 FEET; THENCE NORTH 0°01’44” EAST 298.11 FEET TO A POINT ON SAID CENTERLINE OF PIERCY STREET; THENCE WEST 40.0 0 FEET ALONG SAID CENTERLINE TO THE TRUE POINT OF BEGINNING.

APN: 678-07-033, 678-07-034, 678-07-035

EX-23.1 5 exh23_1.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM exh23_1.htm

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Mission West Properties, Inc.

Cupertino, California

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3, SEC Nos. 333-133335 and 333-52835-99, and Form S-8, SEC File Nos. 333-80369 and 333-123466 of Mission West Properties, Inc. of our reports dated March 16, 2010, relating to the consolidated financial statements and the effectiveness of Mission West Properties, Inc.’s internal control over financial reporting, which appear in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 16, 2010 relating to the financial statement schedule which appears in this Form 10-K.

\S\ Burr Pilger Mayer, Inc.

San Francisco, California

March 16, 2010

EX-31.1 6 exh31_1.htm CERTIFICATION PURSUANT TO RULE 13A-14(A) FOR CARL E. BERG exh31_1.htm

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Carl E. Berg, certify that:

1.	I have reviewed this annual report on Form 10-K of Mission West Properties, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2010

	By:	/s/ Carl E. Berg
		Carl E. Berg
		Chairman & Chief Executive Officer

EX-31.2 7 exh31_2.htm CERTIFICATION PURSUANT TO RULE 13A-14(A) FOR RAYMOND V. MARINO exh31_2.htm

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Raymond V. Marino, certify that:

1.	I have reviewed this annual report on Form 10-K of Mission West Properties, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2010

	By:	/s/ Raymond V. Marino
		Raymond V. Marino
		President & Chief Operating Officer

EX-31.3 8 exh31_3.htm CERTIFICATION PURSUANT TO RULE 13A-14(A) FOR WAYNE N. PHAM exh31_3.htm

EXHIBIT 31.3

CERTIFICATION PURSUANT TO

RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Wayne N. Pham, certify that:

1.	I have reviewed this annual report on Form 10-K of Mission West Properties, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2010

	By:	/s/ Wayne N. Pham
		Wayne N. Pham
		Vice President of Finance & Controller

EX-32.1 9 exh32_1.htm SARBANES-OXLEY ACT OF 2002 exh32_1.htm

EXHIBIT 32.1

CERTIFICATE PURSUANT TO

18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO

§ 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Mission West Properties, Inc. (the “Company”) for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Carl E. Berg, Chairman of the Board and Chief Executive Officer, Raymond V. Marino, President and Chief Operating Officer, and Wayne N. Pham, Vice President of Finance and Controller of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods included in the Report.

/s/ Carl E. Berg
Carl E. Berg Chairman of the Board and Chief Executive Officer March 16, 2010

/s/ Raymond V. Marino
Raymond V. Marino President and Chief Operating Officer March 16, 2010

/s/ Wayne N. Pham
Wayne N. Pham Vice President of Finance and Controller March 16, 2010

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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