10-K

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, 2011

OR

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______________ to______________

Commission File 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 o   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 o   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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 x   No o

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  o          Accelerated filer  x          Non-accelerated filer  o          Smaller reporting company  o

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

As of June 30, 2011, the aggregate market value of the Registrant’s common stock held by non-affiliates of the registrant was $177,454,951 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 29, 2012
Common Stock, $.001 par value per share	22,668,020 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement in connection with the Registrant’s 2012 Annual Meeting of Stockholders 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 discussions 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,” “estimate,” “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, the 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”).

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MISSION WEST PROPERTIES, INC.

2011 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	15
Item 2.	Properties	16
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22
	PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	82
Item 9A.	Controls and Procedures	82
Item 9B.	Other Information	82
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	83
Item 11.	Executive Compensation	83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions, and Director Independence	83
Item 14.	Principal Accountant Fees and Services	83
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	84
	Signatures	85
	Rule 13a-14(a) Certifications
	Section 1350 Certifications

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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, 2011, we owned and managed 111 properties totaling approximately 8.0 million rentable square feet of R&D properties through six 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: Microsoft Corporation and Apple, 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 original 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.

In December 2011, upon approval of the Independent Directors Committee of the board of directors, we effected a division of two of the operating partnerships, to create new holding vehicles for certain of the properties of each of such operating partnerships. In the first operating partnership division transaction, Mission West Properties, L.P. I (“MWP I”) formed a new Delaware limited partnership, Mission West Properties, L.P. IV (“MWP IV”), to which it contributed two buildings leased to Apple, Inc., a 211,000 square foot building located at 10050 N. De Anza Boulevard, Cupertino, CA  and a 105,000 square foot building located at 20400 Mariani Avenue, Cupertino, CA.  The terms of the MWP IV limited partnership agreement were made substantially identical to the terms of the limited partnership agreement of MWP I, and the relative interests of the Company as general partner and Carl Berg, Clyde Berg and Kara Berg as the limited partners in both partnerships remained the same. The total number of ownership units of operating partnership interests (“O.P. Units”) in the two limited partnerships after the division transaction was the same as the total number of outstanding O.P. Units of MWP I prior to the division. To effectuate that, the number of O.P. Units of MWP I equal to the number of new O.P. Units issued by MWP IV were canceled, and such number of MWP IV O.P. Units were issued in substitution for the former O.P. Units in a transaction in which no consideration was paid by the distributee partners. In the second operating partnership division transaction, Mission West Properties, L.P. II (“MWP II”) created a new Delaware limited partnership, Mission West Properties, L.P. V (“MWP V”), to which it contributed a property consisting of 148,600 square feet of improvements located in three buildings at the corner of Montague and Trade Zone, California and unimproved Parcels 4, 5, 9, 10, 11, 12, and 13 of McCandless Technology Park, Milpitas, California, and distributed new O.P. Units of MWP V to the Company and Carl Berg and Clyde Berg as the limited partners of MWP II in the same relative percentages as their ownership interests in MWP II. The total number of O.P. Units of these two operating partnerships outstanding after the division transaction is the same as the total number of O.P. Units of MWP II outstanding prior to the division. To effectuate that, the same number of MWP II O.P. Units as the new O.P. Units issued by MWP V were canceled, and such number of MWP V O.P. Units were issued in substitution for the former O.P. Units in a transaction in which no consideration was paid by the distributee partners. The terms of the MWP V limited partnership agreement are substantially identical to the terms of the limited partnership agreement of MWP II. The Company is the sole general partner of both of the new operating partnerships. The capitalization, properties, liabilities and respective interests of the Company and the operating partnerships as a whole have remained the same following the operating partnership division transactions as they were prior to them, except that some of the properties formerly held in the name of MWP I now are held in the name of MWP IV, and some of the properties formerly held in the name of MWP II now are held in the name of MWP V, and neither of the two new partnerships have any mortgage debt. The operating partnerships Mission West Properties, L.P. and Mission West Properties, L.P. III were unaffected by the transactions. The two new operating partnerships also became parties to the acquisition agreement and the exchange rights agreement, which are discussed below, so that all of the O.P. Units of those partnerships have the same rights as the O.P. Units of the other operating partnerships. There was no issuance of common shares associated with these transactions, and the total number of O.P. Units outstanding was the same immediately before and after the transactions.

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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 3,453,000 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.

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, June 28, 1999, and December 30, 2011), and an exchange rights 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; 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 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 8.8% 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 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. 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.

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Acquiring Properties Developed by the Berg Group

We entered into the Berg land holdings option agreement in December 1998 under which we had an option to purchase all land acquired, directly or indirectly, by Carl E. Berg or Clyde J. Berg that had not been improved with completed buildings and which were zoned, intended or appropriate for R&D, office and/or industrial development or use in the states of California, Oregon and Washington. The Berg land holdings option agreement expired on December 31, 2010. However, the Berg Group remains obligated to present to us in the first instance all investment and acquisition opportunities for development of this nature in these three states, as explained further below under “Opportunistic Acquisitions.”

As of December 31, 2011, 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.

Although the Berg land holdings option agreement expired on December 31, 2010, we anticipate that we will continue to work with the Berg Group in identifying and acquiring future R&D properties presented by the Berg Group. As a general policy which has been established by the Independent Directors Committee of the board of directors, we typically acquire properties from the Berg Group when 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 Real Estate (the “CT Report”), vacancy rates for Silicon Valley R&D property decreased from approximately 18.7% in late 2010 to 15.8% at the end of 2011. Total vacant R&D square footage in Silicon Valley at the end of the fourth quarter of 2011 amounted to approximately 26.7 million rentable square feet, of which 8.3%, or approximately 2.2 million rentable square feet, was sublease space. According to the CT Report, in 2010 total positive net absorption (which is the computation of gross square footage leased less gross new square footage vacated for the period presented) amounted to approximately 0.4 million rentable square feet, and in 2011 there was total positive net absorption of approximately 4.0 million rentable square feet. Conditions in the local R&D property market have been improving due to higher demand for space by technology companies in anticipation of expanding their employment base. According to the CT Report, the average asking market rent per square foot was $1.15 and $1.01 at year-end 2011 and 2010, respectively. However, the Silicon Valley R&D property market is characterized by a substantial number of submarkets, with rent and vacancy rates varying by submarket and location within each submarket, and 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.

Leasing activity for new build-to-suit and vacated R&D properties has slowed considerably during the past several years, but has improved within the last year. Nevertheless, the time to complete the marketing and lease up of vacant space can take anywhere from 18 to 40 months in many cases 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 2012 renewal rental rates for our properties may be approximately equal to, greater than, or perhaps, below current market rents. Excluding month-to-month leases comprised of approximately 88,000 rentable square feet, leases representing approximately 426,000 rentable square feet, representing approximately 4.3% of our projected 2012 cash rent, are scheduled to expire during 2012. 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.

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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

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. 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 of the board of directors 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 (63 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 governmental 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 of the board of directors.

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.

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

·   External Development Affiliate. Although the Berg land holdings option agreement expired 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 diverse 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 six 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 six 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 partnerships. 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.

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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 additional 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 dividends, 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 December 31, 2011, 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 our agreements with the Berg Group 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 underwriters’ 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.

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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 29, 2012, 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.

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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, market and economic conditions have been unprecedented and challenging with tighter credit conditions and modest growth through 2011. For the year ended December 31, 2011, continued concerns about the 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 and the real estate market, in particular. While recent economic data reflects moderate economic growth in the United States, these conditions, combined with low business and consumer confidence and high unemployment have contributed to high volatility and a zero-to-low growth business environment with businesses generally reluctant to take risks, expand operations and hire additional workers.  Substantial regulatory uncertainty and new burdens on businesses have contributed to the weak business environment.

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 financial condition and results of operations.

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

As of December 31, 2011, we had R&D space available for lease representing approximately 27.7% of the total rentable square footage of our properties. In addition, leases representing approximately 426,000 rentable square feet are scheduled to expire in 2012. 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 are located 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 increases, our financial condition, results of operations, cash flows, could be adversely affected, and consequently, the quoted trading price of our security, our ability to satisfy our debt service obligations and to pay distributions to stockholders may be affected adversely as well.

We have announced the intention of our board of directors to identify potential strategic alternatives, but there can be no assurance that we will find or complete any such transaction at or, that any such transaction would be completed at a price per share of common stock that is at or above the current price of our common stock.

In December 2011, we announced that our board of directors had authorized management to explore strategic alternatives for the possible sale of the Company.  The price of our common stock increased significantly subsequent to that announcement, and possibly as a consequence of it. To date, we have not identified any such transaction for negotiation by management or review and approval by the board of directors or made any decision to sell the Company. It is possible that no such strategic alternative will be identified or completed, or that if we identify and agree to proceed with such an alternative, that it will provide for the payment of a price per share equal to or in excess of the current market price of our common stock. If we are unable to identify and complete such a transaction at a price at least equal to the current price, we would expect the price of a share of our common stock to decline, perhaps materially.

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

Our ability to acquire properties and invest in improvements to existing properties depends upon our ability to obtain capital on affordable terms. We expect to encounter difficulty in obtaining substantial new debt financing for property improvements and acquisitions and believe this lack of financing will limit the level of our new investment activity and diminish our prospects for growth in the foreseeable future.

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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 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 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 corporation. 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 73.9% of the equity interests in the operating partnerships and approximately 73.6% of our equity interests on a Fully Diluted basis as of December 31, 2011. 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.

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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 by the Berg Group, 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 land holdings option agreement expired on December 31, 2010, and we no longer have the right to acquire properties from the Berg Group or the pre-determined terms provided in that agreement. However, the Berg Group remains obligated to present to us in the first instance all investment and acquisition opportunities for development in the states of California, Oregon and Washington. Although we do not currently perceive growth opportunities from the land that was 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.

Terms of Transfers: Enforcement of Agreement of Limited Partnership

The terms of 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.

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Related Party Debt

We are liable to the Berg Group under a mortgage loan of approximately $7.1 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. Also, funds from operations have not always been sufficient to fund both full dividend distributions and our full debt service obligations, so from time-to-time the Berg Group has provided short-term funding for dividend distributions, but is not obligated to do so. Due to the lack of large short-term credit facilities, and the favorable terms that have been provided to us by the Berg Group, we frequently rely on these short-term loans from the Berg Group, which may not always be available. As of the date of this report, we had no short-term debt owing to the Berg Group, but our need for such funding in the future is conceivable. If the Berg Group is unwilling or unable to provide such short-term debt funding, we will have to find other probably more expensive sources of 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 of 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.”

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, the 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 pay distributions to stockholders may be adversely affected.

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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 the 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 $69.0 million outstanding as of December 31, 2011, 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 do not expect there to be such a sale or transfer in the foreseeable future, other than in connection with a sale of the Company, the possibility of which is being explored currently by our management, and pursuant to which we would expect to make arrangements for the assumption or repayment this indebtedness. The members of the Berg Group have no obligation to us to refrain from any such sale or other transfer apart from a transaction involving the sale of the entire Company. 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. 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.

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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, 2011, 2010 and 2009, 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 period 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 stockholder 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.

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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;

·   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 our 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.

-14-

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, 2011, 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 exchange 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.

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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 10 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, 2011:

Location	No. of Properties	Total Rentable Sq. Ft.	Percentage Occupied as of 12/31/2011	Average 2011 Occupancy	Major Tenants	Major Tenants Rentable Sq. Ft. at 12/31/2011	2011 Annual Base Rent (1)
5300-5350 Hellyer Avenue (2)	2	160,000	100%	100%	Tyco Electronics Corporation	160,000	$4,200,762
10401-10411 Bubb Road (2)	1	20,330	100%	100%	Aeroflex, Inc.	20,330	350,697
45365-45395 Northport Loop West	1	64,218	57%	42%	Optovue, Inc.	36,646	162,149
45738 Northport Loop West	1	44,256	55%	54%	Measurement Specialties, Inc.	24,499	343,382
4050 Starboard Drive	1	52,232	0%	8%	Vacant	-	45,195
3501 West Warren Avenue & 46600 Fremont Boulevard	1	67,864	60%	46%	Encore Solar, Inc. Sunnyvale Fluid System Tech, Inc.	25,000 15,675	268,662
48800 Milmont Drive	1	53,000	0%	0%	Vacant	-	-
4750 Patrick Henry Drive	1	63,105	100%	100%	Infoblox, Inc.	63,105	714,886
Triangle Technology Park (2)	7	416,927	69%	71%	Intevac Corporation Comtech Xicom Technology, Inc. LSA Cleanpart, LLC	169,583 71,216 31,500	3,260,759

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Location	No. of Properties	Total Rentable Sq. Ft.	Percentage Occupied as of 12/31/2011	Average 2011 Occupancy	Major Tenants	Major Tenants Rentable Sq. Ft. at 12/31/2011	2011 Annual Base Rent (1)
5830-5870 Hellyer Avenue	1	109,715	71%	71%	Shocking Technologies, Inc. MeiVac, Inc.	51,859 26,557	858,685
5750 Hellyer Avenue	1	73,312	100%	100%	NDS Surgical Imaging, LLC	73,312	755,362
5500-5550 Hellyer Avenue	2	196,534	68%	68%	CTS Corporation Snap-on, Inc.	81,242 52,243	1,908,893
5400 Hellyer Avenue	1	77,184	80%	65%	Quantum 3D, Inc. Capella, Inc.	39,777 21,750	498,478
5325-5345 Hellyer Avenue	2	256,500	100%	100%	Celestica Asia, Inc.	256,500	6,652,044
5905-5965 Silver Creek Valley Rd.	4	346,000	0%	0%	Vacant	-	-
5845 Hellyer Avenue	1	98,500	0%	0%	Vacant	-	-
845-855 Embedded Way	1	67,912	100%	100%	Celestica Asia, Inc. Lynuxworks, Inc.	39,039 28,873	1,122,678
1065-1105 La Avenida Street	5	515,700	100%	100%	Microsoft Corporation	515,700	13,494,452
1040-1050 La Avenida Street	1	41,354	0%	0%	Vacant	-	-
1875 Charleston Road	1	42,126	100%	100%	Google, Inc.	42,126	944,548
1750 Automation Parkway	1	80,641	100%	100%	JDS Uniphase Corporation	80,641	841,882
1756 Automation Parkway	1	80,640	36%	36%	A&D Engineering, Inc.	28,739	346,788
1762 Automation Parkway	1	61,100	100%	100%	Hermes Microvision, Inc.	61,100	805,634
1764 Automation Parkway	1	110,592	67%	67%	2Wire, Inc.	74,584	889,386
255 Caspian Drive	1	119,756	100%	100%	Equinix Operating Company, Inc.	119,756	2,786,347
245 Caspian Drive (3)	1	-	-	-	-	-	-
5941 Optical Court	1	67,500	90%	84%	Redevelopment Agency of San Jose Aria Diagnostics, Inc.	36,594 23,994	416,308
5981 Optical Court	1	110,542	100%	100%	SoloPower, Inc.	110,542	2,385,060
5970 Optical Court	1	128,520	100%	100%	Orbotech Ltd.	128,520	1,465,128
5900 Optical Court	1	165,000	100%	100%	Stryker Corporation	165,000	3,078,240
2630 Orchard Parkway	1	60,633	100%	8%	Aruba Networks, Inc.	60,633	120,000
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	1,041,183
2880 Scott Boulevard	1	200,000	100%	100%	NEC Electronics America, Inc.	200,000	2,823,403
2890 Scott Boulevard	1	75,000	100%	100%	Nvidia Corporation	75,000	1,716,714
2770-2800 Scott Boulevard	1	99,800	100%	100%	Nvidia Corporation	99,800	1,472,554
2300 Central Expressway	1	46,338	100%	100%	Huawei Technologies Company Ltd.	46,338	765,462
2220 Central Expressway	1	62,522	100%	100%	Huawei Technologies Company Ltd.	62,522	850,060
2330 Central Expressway	1	62,522	100%	100%	Huawei Technologies Company Ltd.	62,522	1,032,810
233 South Hillview Drive	2	95,690	100%	100%	Exar Corporation	95,690	945,410
2251 Lawson Lane	1	125,000	51%	51%	Synaptics, Inc.	64,270	1,234,279

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Tenant	No. of Properties	Total  Rentable Sq. Ft.	Percentage Occupied as of 12/31/2011	Average 2011 Occupancy	Major Tenants	Major Tenants Rentable Sq. Ft. at 12/31/2011	2011 Annual Base Rent (1)
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
20400 Mariani Avenue	1	105,000	100%	100%	Apple, Inc.	105,000	3,809,319
10500 De Anza Boulevard	1	211,000	100%	100%	Apple, Inc.	211,000	4,448,019
20605-705 Valley Green Drive	2	142,000	100%	100%	Apple, Inc.	142,000	2,718,530
10300 Bubb Road	1	23,400	100%	100%	Apple, Inc.	23,400	416,808
10440 Bubb Road	1	19,500	100%	100%	Apple, Inc.	10,833	291,188
10450-10460 Bubb Road	1	45,460	100%	100%	Ricoh Corporation Apple, Inc.	30,460 15,000	686,337
1135 Kern Avenue	1	18,300	0%	0%	Vacant	-	-
450 National Avenue	1	36,100	28%	28%	AnchorFree, Inc.	10,000	240,324
3301 Olcott Street	1	64,500	73%	73%	Mosys, Inc.	46,886	596,668
2800 Bayview Avenue	1	59,736	0%	0%	Vacant	-	-
5521 Hellyer Avenue	1	203,800	100%	78%	Nanosolar, Inc.	203,800	1,636,521
6850 Santa Teresa Boulevard	1	30,000	41%	41%	Bio-Medical Applications of CA, Inc	12,350	134,599
6810 Santa Teresa Boulevard & 180 Great Oaks Boulevard	1	54,996	100%	93%	ZiLOG, Inc.	40,527	712,253
140-160 Great Oaks Boulevard & 6781 Via Del Oro	2	105,300	72%	75%	Semiconductor Tooling Services Instant Asphalt, Inc.	53,300 22,000	767,449
6540-6541 Via Del Oro & 6385-6387 San Ignacio Avenue	2	66,600	69%	68%	Modutek Corporation Amtech, Inc.	17,400 10,892	346,438
6311-6351 San Ignacio Avenue	5	362,767	73%	73%	Stion Corporation	265,612	1,125,097
6320-6360 San Ignacio Avenue	1	157,292	0%	0%	Vacant	-	-
25-75 East Trimble Road & 2610 North First Street	2	170,810	30%	46%	Public Wireless, Inc.	45,191	785,523
2904 Orchard Parkway	1	75,335	100%	100%	BAE Systems Land & Armaments	75,335	1,348,497
3236 Scott Boulevard	1	54,672	49%	49%	Universal Semiconductor Tech., Inc.	26,716	210,789
1212 Bordeaux Lane	1	71,800	100%	100%	Loral Space & Communications, Inc.	71,800	734,298
McCandless Technology Park	12	589,482	0%	0%	Vacant	-	-
1600 Memorex Drive	1	107,500	64%	25%	BT INS, Inc.	22,800	245,910
1688 Richard Avenue	1	52,800	100%	100%	NWE Technology, Inc.	52,800	429,888
1700 Richard Avenue	1	58,783	100%	100%	Silicon Valley Colocation, Inc.	58,783	1,670,787
Morgan Hill Land (4)	-	-	-	-	-	-	-
300 Montague Expressway (5)	1	49,457	0%	0%	Vacant	-	29,853
337 Trade Zone Boulevard	1	42,912	0%	0%	Vacant	-	-
324-368 Montague Expressway	1	56,265	0%	0%	Vacant	-	-
TOTAL	111	8,039,947	72%				$85,202,650

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(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 in 2001. See Item 8, “Financial Statements and Supplementary Data – Note 22” for the application of this obligation by the Berg Group.

(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.

(5)   The $29,853 rent received at the 300 Montague Expressway property represents rent for roof space.

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.

For the years ended December 31, 2011, 2010 and 2009, the occupancy rates for leased properties in our portfolio were approximately 72.3%, 69.9% and 65.5%, respectively.

The average annual rental per square foot for our portfolio of properties for the years ended December 31, 2011, 2010 and 2009 was approximately $15.05, $15.54 and $15.58, respectively.

We have four properties, namely the McCandless Technology Park, 300 Montague Expressway, 337 Trade Zone Boulevard and 324-368 Montague Expressway, consisting of approximately 738,000 rentable square feet that are re-zoned for residential development. We are not actively seeking to lease these properties because we expect to sell them. Most of these properties are classified as assets held for sale because they meet the criteria set forth in the accounting provisions of assets held for sale.

Schedule of Lease Expirations

The following table sets forth a schedule of the lease expirations for the properties beginning with 2012, assuming that none of the tenants exercise existing renewal options or termination rights.  The table excludes approximately 2,673,000 rentable square feet that were vacant as of December 31, 2011.

Year of Lease Expiration	Number of Expiring Leases	Rentable Square Footage Subject to Expiring Leases (1)	2012 Annual Base Rent Under Expiring Leases (2)	Percentage of Total Annual Base Rent Represented By Expiring Leases (3)
2012	9	425,587	$3,357,296	4.3%
2013	7	361,923	5,384,022	7.0%
2014	22	1,823,675	29,384,379	37.9%
2015	8	587,437	9,334,125	12.1%
2016	8	394,806	4,550,977	5.9%
2017	12	727,552	9,816,647	12.7%
2018	5	431,606	5,280,550	6.8%
2019	2	212,480	3,433,726	4.4%
2020	3	208,768	4,471,322	5.8%
Thereafter	1	105,000	2,440,715	3.1%
Total	77	5,278,834	$77,453,759	100%

(1)   Excludes approximately 88,000 rentable square feet which are on month-to-month leases.

(2)   The base rent for expiring leases is based on 2012 scheduled cash rent, which is different than annual rent determined in accordance with GAAP.

(3)   Based upon 2012 cash rent as discussed in Note (2).

According to the CT Report, the average asking market rent per square foot was $1.15 at year-end 2011. Leases that expired in 2011 had an average asking market rent per square foot of $1.19. Leases scheduled to expire in 2012 have an average asking market rent per square foot of $1.15, 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 market is characterized by a substantial number of submarkets, with rent and vacancy rates varying by submarket and location within each submarket. We believe that the average 2012 renewal rental rates for our properties will be approximately equal to, greater than, or perhaps, below current market rents.

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Leasing activity for new build-to-suit and vacated R&D properties has slowed considerably during the past several years, but has improved within the last year. The time to complete the marketing and lease up of vacant space can take anywhere from 18 to 40 months in many cases as a result of the over-supply of R&D properties in the market. We anticipate renewing approximately 60% of the 426,000 rentable square feet scheduled to expire in 2012. Due to the over-supply of R&D properties in the market, we are still experiencing difficulties leasing current available space due to competition with other landlords.

As of December 31, 2011, two tenants individually leased in excess of 300,000 rentable square feet from us: Microsoft Corporation and Apple, Inc. Microsoft and Apple represented approximately 15.8% and 13.8% of our total 2011 cash base rent, respectively.

The Microsoft lease expires in August 2014 with two separate options to extend the lease for two successive additional periods of five years commencing on the expiration of the initial lease term upon the same terms and conditions of the initial lease term except that base rent for each option shall be determined at 95% of the fair market rent for the option term with annual increases in base rent.

We have five leases with Apple for multiple properties, with one lease expiring in 2012, two leases expiring in 2014, one lease expiring in 2018, and one lease expiring in 2022. We are currently negotiating the terms for the lease expiring in 2012. These leases have a range of one to three separate options to extend the lease for successive additional periods of three to five years commencing on the expiration of the initial lease term upon the same terms and conditions of the initial lease term except that base rent for each option shall be determined at 95% of the fair market rent for the option term with annual increases in base rent.

If we are unable to lease a significant portion of the available space and space scheduled to expire in 2012 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.

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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 all 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 of properties in the vicinity of the properties, or by third parties unrelated to us.

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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, 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 which 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. A trial in the California Superior Court commenced in February 2009. 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. 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. On July 18, 2011, the superior court denied our appeal. We requested that the superior court’s decision be reviewed by the California Supreme Court. In October 2011, we learned that our appeal efforts with the California Supreme Court were unsuccessful. In December 2011, we finalized the details with our legal counsel to arrange for the transfer of funds held by the California Superior Court to pay off the judgment plus accrued interest, and coordinate with the Independent Directors Committee of the Board of Directors and Berg & Berg Enterprises, Inc. (“BBE”) on the transfer of the former RPC interest from BBE to RPC. We have accrued approximately $4.4 million in interest expense since September 2009 on the amount of past distributions that would be payable to RPC by Hellyer Avenue Limited Partnership (“Hellyer LP”) based on the judgment determined at the legal rate of interest of 10%. In addition, we have accrued approximately $1.3 million in interest receivable due from BBE because past distributions with respect to RPC’s interest in Hellyer LP were paid to BBE, which interest income accrual was calculated at an interest rate of LIBOR plus 1.25%. Payments to RPC in the amount of approximately $8.9 million, together with pre-judgment interest of 10% in the sum of approximately $4.2 million, for a total of approximately $13.1 million were deducted from the $14.0 million deposited with the clerk of the Santa Clara County Superior Court in December 2011 and February 2012. Approximately $0.9 million of the 14.0 million deposit will be refunded to us.

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

Item 4.   Mine Safety Disclosures

None.

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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 29, 2006 to December 31, 2011. The line graph starts December 29, 2006. The graph assumes that the value of the investment in the Company’s common stock was $100 at December 31, 2006 and that all dividends were reinvested. The common stock’s price on December 29, 2006 was $13.10. 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 30, 2011, the last trading day of the year, was $9.02 per share. The closing high and low price per share of common stock as reported on NASDAQ during each quarter of 2011 and 2010 were as follows:

	2011		2010
	High	Low	High	Low
1st Quarter	$6.96	$6.47	$7.74	$6.47
2nd Quarter	$8.80	$6.42	$7.74	$6.50
3rd Quarter	$8.83	$6.91	$7.15	$6.50
4th Quarter	$9.11	$7.00	$7.12	$6.50

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On February 29, 2012, there were 130 registered holders of the Company’s common stock.

Dividend Policy

We declared and paid dividends in each quarter of 2011 and 2010. We expect to pay quarterly dividends in 2012. The following tables show information for quarterly dividends for 2011 and 2010.

	2011
	Record Date	Payment Date	Dividend Per Share
1st Quarter	03/31/11	04/07/11	$0.13
2nd Quarter	06/30/11	07/07/11	0.13
3rd Quarter	09/30/11	10/06/11	0.13
4th Quarter	12/30/11	01/05/12	0.13
Total			$0.52

	2010
	Record Date	Payment Date	Dividend Per Share
1st Quarter	04/02/10	04/08/10	$0.15
2nd Quarter	06/30/10	07/08/10	0.15
3rd Quarter	09/30/10	10/07/10	0.15
4th Quarter	12/31/10	01/06/11	0.15
Total			$0.60

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 our earnings, financial condition, capital requirements, debt service requirements and other factors.

For federal income tax purposes, we have characterized the dividends declared in 2011 as follows: 95.4% taxable ordinary income and 4.6% long-term capital gain (unaudited). For 2010, we have characterized 83.7% taxable ordinary income and 16.3% long-term capital 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.

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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,
	2011			2010			2009			2008			2007
	(dollars in thousands, except per share data)
OPERATING INFORMATION: (1)
Operating revenues:
Rental income	$	83,574		$	81,037		$	81,458		$	77,826		$	78,162
Above market lease intangible asset amortization		-			-			-			-			(4,091	)
Tenant reimbursements		17,701			14,868			18,273			15,775			12,436
Other income, including lease terminations and settlements		3,581			2,590			3,708			4,184			61,931
Total operating revenues		104,856			98,495			103,439			97,785			148,438
Operating expenses:
Property operating, maintenance and real estate taxes		22,154			25,104			26,110			21,793			18,720
General and administrative		2,378			2,219			2,336			2,635			3,035
Depreciation and amortization		22,839			22,122			22,428			21,467			20,917
Total operating expenses		47,371			49,445			50,874			45,895			42,672
Operating income		57,485			49,050			52,565			51,890			105,766
Other income (expenses):
Equity in earnings of unconsolidated joint venture		27			303			309			19,617			1,408
Interest and dividend income		515			102			1,309			1,735			3,086
Realized and unrealized gain (loss) from restricted investment		-			4,067			5,011			(278	)		-
Interest expense		(20,505	)		(20,068	)		(22,117	)		(19,787	)		(20,131	)
Interest expense – related parties		(631	)		(988	)		(765	)		(1,332	)		(724	)
Income from continuing operations		36,891			32,466			36,312			51,845			89,405
Discontinued operations:
Net gain on disposal of discontinued operations (2)		3,891			6,199			-			-			6,529
Net loss attributable to discontinued operations (2)		(1,881	)		(2,170	)		(1,863	)		(1,505	)		(86	)
Income (loss) from discontinued operations		2,010			4,029			(1,863	)		(1,505	)		6,443
Net income		38,901			36,495			34,449			50,340			95,848
Net income attributable to noncontrolling interests		(29,626	)		(28,022	)		(26,058	)		(40,206	)		(76,960	)
Net income available to common stockholders	$	9,275		$	8,473		$	8,391		$	10,134		$	18,888
Weighted average shares of common stock (basic)		22,489,475			21,973,599			21,736,699			19,714,414			19,627,234
Weighted average shares of common stock (diluted)		22,917,552			22,121,724			21,923,104			19,996,349			19,854,411
Basic net income per share from continuing operations	$	0.40		$	0.36		$	0.40		$	0.52		$	0.91
Diluted net income per share from continuing operations	$	0.39		$	0.35		$	0.39		$	0.52		$	0.90
Basic net income (loss) per share from discontinued operations	$	0.01		$	0.03		$	(0.01	)	$	(0.01	)	$	0.05
Diluted net income (loss) per share from discontinued operations	$	0.01		$	0.03		$	(0.01	)	$	(0.01	)	$	0.05
Basic net income per share to common stockholders	$	0.41		$	0.39		$	0.39		$	0.51		$	0.96
Diluted net income per share to common stockholders	$	0.40		$	0.38		$	0.38		$	0.51		$	0.95
PROPERTY AND OTHER INFORMATION:
Total properties, end of period (3)		111			111			111			111			109
Total rentable square feet, end of period (000’s)		8,040			8,011			8,048			8,048			7,862
Average monthly rental income per square foot(4)	$	1.25		$	1.30		$	1.30		$	1.25		$	1.42
Occupancy for leased properties, end of period		72	%		70	%		66	%		66	%		62	%
Dividends per share to common stockholders	$	0.52		$	0.60		$	0.65		$	0.80		$	0.64
Funds from operations (5)	$	60,693		$	56,018		$	60,467		$	55,334		$	114,867
Funds from operations per share (5) (6)	$	0.57		$	0.53		$	0.57		$	0.52		$	1.09
CASH FLOW INFORMATION:
Cash flows provided by operating activities	$	72,481		$	81,768		$	56,072		$	76,872		$	78,814
Cash flows provided by (used in) investing activities	$	4,156		$	(6,738	)	$	(278	)	$	(26,496	)	$	(8,548	)
Cash flows used in financing activities	$	(80,625	)	$	(72,028	)	$	(54,808	)	$	(74,067	)	$	(80,360	)

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	December 31,
		2011		2010		2009		2008		2007
	(dollars in thousands)
BALANCE SHEET INFORMATION:
Net investments in properties	$	881,147	$	894,980	$	919,647	$	943,579	$	922,117
Total assets	$	936,487	$	968,284	$	986,389	$	1,034,285	$	1,053,885
Mortgage notes payable	$	331,166	$	345,770	$	318,818	$	330,908	$	337,520
Mortgage note payable – related parties	$	7,139	$	7,721	$	8,261	$	8,761	$	9,224
Note payable – related parties		-		-	$	9,325		-		-
Revolving line of credit	$	3,305		-	$	14,466	$	13,079		-
Total liabilities	$	383,400	$	398,313	$	389,260	$	402,382	$	388,581
Stockholders’ equity	$	142,961	$	142,070	$	144,844	$	134,418	$	138,678
Noncontrolling interests in operating partnerships	$	410,126	$	427,901	$	452,285	$	497,485	$	526,626
Common stock issued and outstanding		22,586,020		22,135,770		21,870,211		19,748,211		19,664,087
O.P. Units issued and outstanding		82,700,015		83,150,265		83,404,965		85,526,965		85,533,935

(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, 2011, 2010, 2009, 2008 and 2007, 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. See Item 8, “Financial Statements and Supplementary Data – Note 22” for the application of this obligation by the Berg Group.

(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 2011, 2010, 2009, 2008 and 2007 FFO calculation includes 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. FFO 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 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, 2011, 2010, 2009, 2008 and 2007 follows:

	Year Ended December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands, except per share data)
Net income	$	38,901		$	36,495		$	34,449		$	50,340		$	95,848
Add:
Depreciation and amortization (1)		26,097			26,078			26,425			25,833			26,050
Less:
Gain on sales of assets or joint venture assets		(3,891	)		(6,199	)		-			(20,471	)		(6,529	)
Noncontrolling interests in joint ventures		(414	)		(356	)		(407	)		(368	)		(502	)
FFO	$	60,693		$	56,018		$	60,467		$	55,334		$	114,867
Weighted average common shares and O.P. Units - diluted		105,714,112			105,432,088			105,461,581			105,524,677			105,016,651
FFO per common share and O.P. Unit - diluted	$	0.57		$	0.53		$	0.57		$	0.52		$	1.09

(1)   Also includes our portion of depreciation and amortization of real estate from our unconsolidated joint venture totaling approximately $238, $238, $238, $900 and $757 in 2011, 2010, 2009, 2008 and 2007, respectively, amortization of leasing commissions totaling approximately $2,016, $2,090, $2,077, $1,709 and $2,558 in 2011, 2010, 2009, 2008 and 2007, respectively, and depreciation from discontinued operations totaling approximately $1,004, $1,629, $1,682, $1,758 and $1,818 in 2011, 2010, 2009, 2008 and 2007, 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)

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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 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 aggregate 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 partnerships. Our general partner interests represented the balance of the ownership of the operating partnerships. At December 31, 2011, we owned a 21.36% 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 7.2 million rentable square feet of R&D buildings and vacant land under our agreements with the Berg Group and from unrelated third parties. The total cost of these properties was approximately $754.0 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 $340.2 million.

Since 1998, we have sold a total of approximately 1.1 million rentable square feet of R&D buildings. The total sales price of these properties was approximately $165.7 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;

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·   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.

2011 Highlights

Leasing - During 2011, we executed new leases on approximately 241,000 rentable square feet with a weighted average rental rate of $1.19 per square foot and renewed leases for approximately 778,000 rentable square feet with a weighted average rental rate of $1.45 per square foot. Total tenant improvements and leasing commissions related to new and renewed leases were approximately $1.9 million and $1.1 million, respectively.

Acquisition - In 2011, we acquired one building in San Jose for a total purchase price of approximately $10.8 million consisting of approximately 67,500 rentable square feet.

Disposition - In 2011, we sold one building in Milpitas for a total sales price of approximately $7.3 million consisting of approximately 38,600 rentable square feet.

Financing - In 2011, we increased our revolving line of credit with the Heritage Bank of Commerce from $17.5 million to $19.0 million.

Company Sale Status

In late December 2011, we reported that we were exploring strategic alternatives for the possible sale of the Company and that our board of directors had authorized management to initiate a process to identify potential qualified buyers and determine an appropriate structure for the sale of the Company taking into account the potential value of the transaction to stockholders and operating unit holders. We conducted a broad-based marketing effort and currently are still reviewing proposals from potential qualified buyers. At this time, however, we are not engaged in any transaction, and our board of directors has not made a decision to recommend or authorize a sale of the Company.

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, 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

Acquisitions of properties 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 provisions 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.

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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 market 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 deferred rent provision 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 provision 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. Actual 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. For the year ended December 31, 2011, 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). The arrangement with M&M terminated on December 31, 2011, and the VIE consolidation will cease effective January 1, 2012.

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” on the consolidated balance sheets.

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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, provisions against deferred rent, 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.

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Results of Operations

Comparison of the year ended December 31, 2011 to the year ended December 31, 2010

Rental Income

As of December 31, 2011 and 2010, through our controlling interests in the operating partnerships, we owned 111 R&D properties totaling approximately 8.0 million rentable square feet. We acquired one R&D property and sold one R&D property in 2011.

The following table depicts the amounts of rental income from operations for the years ended December 31, 2011 and 2010, 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,
	2011		2010		$ Change		% Change
	(dollars in thousands)
Same Property (1)	$	83,158	$	81,037	$	2,121		2.6	%
2011 Acquisition (2)		416		-		416		100.0	%
Total	$	83,574	$	81,037	$	2,537		3.1	%

(1)   “Same Property” is defined as properties owned by us prior to 2010 that we still owned as of December 31, 2011. There were 110 properties classified as “same property” as of December 31, 2011.

(2)   Operating rental income for 2011 acquisition does not reflect a full 12 months of operations in 2011 because the property was acquired during the year.

For the year ended December 31, 2011, our rental income increased by approximately $2.5 million, or 3.1%. The $2.5 million increase in rental income resulted from 19 new and renewed leases, after reductions attributable to 12 lease terminations during the year ended December 31, 2011. The increase was also the result of a one-time rent adjustment of approximately $1.6 million from a tenant dispute resolution.

Our overall occupancy rate for leased properties at December 31, 2011 and 2010 was approximately 72.3% and 69.9%, respectively. A part of the occupancy improvement was attributable to a vacant property disposition and vacant properties classified as assets held for sale and were not included in the vacancy statistic. According to the CT Report, the leased occupancy rate for R&D property in the Silicon Valley at December 31, 2011, was approximately 84.2%. Due to an over-supply of R&D properties, Silicon Valley landlords are continually bidding competitively for tenants and consequently, our occupancy rate may drop in 2012 if we cannot renew or re-lease the approximately 426,000 rentable square feet scheduled to expire in 2012. 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 due to their location and the weak demand in those submarkets.

Other Income

The following table depicts the amounts of other income, including lease terminations, from operations for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change		% Change
	(dollars in thousands)
Other income	$	3,581	$	2,590	$	991		38.3	%

Other income of approximately $3.6 million for the year ended December 31, 2011, included approximately $1.0 million of management fees, approximately $0.7 million from an incentive to lessee adjustment, $1.4 million from an environmental remediation payment, $0.1 million of termination fee and $0.4 million of miscellaneous income. Other income of approximately $2.6 million for the year ended December 31, 2010, included approximately $1.3 million of litigation proceeds, $1.0 million of management fees, $0.1 million of bankruptcy settlement and $0.2 million of miscellaneous income. We do not consider termination fees to be a recurring item.

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Operating Expenses and Tenant Reimbursements

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, 2011 and 2010, and the percentage of total decrease in expenses over the period that is represented by each group of properties.

	Year Ended December 31,
	2011		2010		$ Change			% Change
	(dollars in thousands)
Same Property (1)	$	22,089	$	25,104	$	(3,015	)		(12.0	%)
2011 Acquisition (2)		65		-		65			100.0	%
Total	$	22,154	$	25,104	$	(2,950	)		(11.8	%)

(1)   “Same Property” is defined as properties owned by us prior to 2010 that we still owned as of December 31, 2011. There were 110 properties classified as “same property” as of December 31, 2011.

(2)   Operating expenses for 2011 acquisition do not reflect a full 12 months of operations in 2011 because the property was acquired during the year.

Operating expenses decreased by approximately ($2.9) million, or (11.8%), from $25.1 million for the year ended December 31, 2010, to $22.2 million for the year ended December 31, 2011, primarily due to lower insurance expense, real estate taxes and repair and maintenance costs. Tenant reimbursements increased by approximately $2.8 million, or 19.1%, from $14.9 million for the year ended December 31, 2010, to $17.7 million for the year ended December 31, 2011. The amount of tenant reimbursements increased primarily because we paid out higher refunds to tenants in 2010, which decreased tenant reimbursements. Total operating expenses exceeded tenant reimbursements because of vacancies, since certain operating expenses such as property insurance, real estate taxes, and other fixed expenses are not recoverable from vacant properties. At December 31, 2011 and 2010, our vacancy rate was approximately 27.7% and 30.1%, respectively.

The following table depicts the amounts of general and administrative expenses from operations for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change		% Change
	(dollars in thousands)
General and administrative	$	2,378	$	2,219	$	159		7.2	%

General and administrative expenses increased by approximately $0.2 million, or 7.2%, from $2.2 million for the year ended December 31, 2010, to $2.4 million for the year ended December 31, 2011. The increase in general and administrative expenses was primarily a result of expenses related to the evaluation of strategic alternative for the sale of the Company.

The following table depicts the amounts of depreciation and amortization expense from operations for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change		% Change
	(dollars in thousands)
Depreciation and amortization	$	22,839	$	22,122	$	717		3.2	%

Depreciation and amortization expense increased by approximately $0.7 million, or 3.2%, primarily due to the amortization of in-place lease value related to a property acquisition in 2011 pursuant to Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations”.

Other Income and Expenses

The following table depicts the amounts of equity in earnings of unconsolidated joint venture for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change			% Change
	(dollars in thousands)
Equity in earnings of unconsolidated joint venture	$	27	$	303	$	(276	)		(91.1	%)

As of December 31, 2011, 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 Toeniskoetter Breeding, Inc. (“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, 2011 and 2010, equity in earnings from the unconsolidated joint venture was approximately $0.03 million and $0.3 million, respectively. The decline was attributable to lower rental income. The occupancy rate for the property owned by this joint venture at December 31, 2011 and 2010 was 100%.

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The following table depicts the amounts of interest income for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change		% Change
	(dollars in thousands)
Interest income	$	515	$	102	$	413		404.9	%

Interest income increased by approximately $0.4 million, or 404.9%, from $0.1 million for the year ended December 31, 2010, to $0.5 million for the year ended December 31, 2011. The increase in interest income resulted primarily from the additional accrual of approximately $0.3 million due from the Berg Group in 2011 related to the RPC litigation based on a court judgment (see Item 3. Legal Proceedings).

	Year Ended December 31,
	2011		2010		$ Change			% Change
	(dollars in thousands)
Realized and unrealized gain from investment		-	$	4,067	$	(4,067	)		(100.0	%)

In 2010, we recorded a net realized and unrealized gain from investment in marketable securities of approximately $4.1 million.

The following table depicts the amounts of interest expense for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change			% Change
	(dollars in thousands)
Interest	$	20,505	$	20,068	$	437			2.2	%
Interest (related parties)		631		988		(357	)		(36.1	%)
Total	$	21,136	$	21,056	$	80			0.4	%

Interest expense increased by approximately $0.4 million, or 2.2%, from $20.1 million for the year ended December 31, 2010, to $20.5 million for the year ended December 31, 2011. Interest expense increased primarily from the accrual of approximately $0.5 million in 2011 related to the RPC litigation based on a court judgment (see Item 3. Legal Proceedings). Interest expense (related parties) decreased by approximately ($0.4) million, or (36.1%), from $1.0 million for the year ended December 31, 2010, to $0.6 million for the year ended December 31, 2011. The decrease in interest expense (related parties) was due to decreased related party borrowings in 2011 compared with 2010.

Income from Discontinued Operations

The following table depicts the amounts of income from discontinued operations for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011			2010
	(dollars in thousands)
Net gain on disposal of discontinued operations	$	3,891		$	6,199
Net loss attributable to discontinued operations		(1,881	)		(2,170	)
Income from discontinued operations	$	2,010		$	4,029

In each of 2011 and 2010, we sold one R&D property. In 2011, we classified 13 R&D properties as assets held for sale and in accordance with the provisions of  ASC Topic 360 “Property, Plant, and Equipment,” classified the net gain on sale and operating results of the disposed property and assets held for sale as discontinued operations. Prior period results of operations for these properties were retrospectively adjusted and presented as discontinued operations in prior consolidated statements of operations.

We recognized total income from discontinued operations of approximately $2.0 million and $4.0 million for the years ended December 31, 2011 and 2010, respectively.

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, 2011 and 2010.

	Year Ended December 31,
	2011		2010		$ Change		% Change
	(dollars in thousands)
Net income available to common stockholders	$	9,275	$	8,473	$	802		9.5	%
Net income attributable to noncontrolling interests		29,626		28,022		1,604		5.7	%
Total net income	$	38,901	$	36,495	$	2,406		6.6	%

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As of December 31, 2011, we owned a controlling general partner interest of 25.74%, 21.86%, 16.32%, 12.53%, 21.86% and 16.32% in the six operating partnerships, Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II, Mission West Properties, L.P. III, Mission West Properties, L.P. IV and Mission West Properties, L.P. V, respectively. As of December 31, 2010, we owned a controlling general partner interest of 24.83%, 21.86%, 16.32% and 12.53% 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. Mission West Properties, L.P. IV and Mission West Properties, L.P. V were created by partnership divisions of Mission West Properties, L.P. I and Mission West Properties, L.P. II in December 2011, in which our percentage ownership and total ownership of each was identical immediately before and after the transactions. We owned a 21.36% and 20.84% general partner interest in the operating partnerships, taken as a whole, on a consolidated weighted average basis as of December 31, 2011 and 2010, respectively. Net income available to common stockholders in 2011 increased by approximately $0.8 million, or 9.5%, from 2010. Net income attributable to noncontrolling interests in 2011 increased by approximately $1.6 million, or 5.7%, from 2010. The increase in net income attributable to common stockholders and noncontrolling interests primarily resulted from higher operating revenues and lower operating expenses in 2011.

Noncontrolling interests represent the limited partners’ ownership interest of 78.64% and 79.16% in the operating partnerships, on a consolidated weighted average basis, as of December 31, 2011 and 2010, respectively.

Comparison of the year ended December 31, 2010 to the year ended December 31, 2009

Rental Income

As of December 31, 2010 and 2009, through our controlling interests in the operating partnerships, we owned 111 R&D properties totaling approximately 8.0 million rentable square feet. We acquired one R&D property and sold one R&D property in 2010.

The following table depicts the amounts of rental income from operations for the years ended December 31, 2010 and 2009, 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,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Same Property (1)	$	80,852	$	81,458	$	(606	)		(0.7	%)
2010 Acquisition (2)		185		-		185			100.0	%
Total	$	81,037	$	81,458	$	(421	)		(0.5	%)

(1)   “Same Property” is defined as properties owned by us prior to 2009 that we still owned as of December 31, 2010. There were 110 properties classified as “same property” as of December 31, 2010.

(2)   Operating rental income for 2010 acquisition does not reflect a full 12 months of operations in 2010 because the property was acquired during the year.

For the year ended December 31, 2010, our rental income decreased by approximately ($0.4) million, or (0.5%). The ($0.4) million decrease in rental income resulted from two lease terminations during the year ended December 31, 2010. In 2010, we offset approximately ($1.2) million in deferred rent against rental income due to lease terminations and lease modifications.

Our overall occupancy rate for leased properties at December 31, 2010 and 2009 was approximately 69.9% and 65.5%, respectively. According to the CT Report, the leased occupancy rate for R&D property in the Silicon Valley at December 31, 2010, was approximately 81.3%. 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 due to their location and the weak demand in those submarkets.

Other Income

The following table depicts the amounts of other income, including lease terminations and settlements, from operations for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Other income	$	2,590	$	3,708	$	(1,118	)		(30.2	%)

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Other income of approximately $2.6 million for the year ended December 31, 2010, included approximately $1.3 million of litigation proceeds, $1.0 million of management fees, $0.1 million of bankruptcy settlement and $0.2 million of miscellaneous income. Other income of approximately $3.7 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 insurance claims, $0.1 million from a lease settlement and $0.3 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.

Operating Expenses and Tenant Reimbursements

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, 2010 and 2009, and the percentage of total decrease in expenses over the period that is represented by each group of properties.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Same Property (1)	$	25,020	$	26,110	$	(1,090	)		(4.2	%)
2010 Acquisition (2)		84		-		84			100.0	%
Total	$	25,104	$	26,110	$	(1,006	)		(3.9	%)

(1)   “Same Property” is defined as properties owned by us prior to 2009 that we still owned as of December 31, 2010. There were 110 properties classified as “same property” as of December 31, 2010.

(2)   Operating expenses for 2010 acquisition do not reflect a full 12 months of operations in 2010 because the property was acquired during the year.

Operating expenses decreased by approximately ($1.1) million, or (4.2%), from $26.1 million for the year ended December 31, 2009, to $25.0 million for the year ended December 31, 2010, primarily due to lower real estate taxes and repair and maintenance costs. Tenant reimbursements decreased by approximately ($3.4) million, or (18.6%), from $18.3 million for the year ended December 31, 2009, to $14.9 million for the year ended December 31, 2010. The decrease in tenant reimbursements resulted primarily from payments to tenants related to a decrease in operating expenses in 2010. Total operating expenses exceeded tenant reimbursements because of vacancies, since certain operating expenses such as property insurance, real estate taxes, and other fixed expenses are not recoverable from vacant properties. At December 31, 2010 and 2009, our vacancy rate was approximately 30.1% and 34.5%, respectively.

The following table depicts the amounts of general and administrative expenses from operations for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
General and administrative	$	2,219	$	2,336	$	(117	)		(5.0	%)

General and administrative expenses decreased by approximately ($0.1) million, or (5.0%), from $2.3 million for the year ended December 31, 2009, to $2.2 million for the year ended December 31, 2010. The decrease in general and administrative expenses was primarily a result of lower stock-based compensation expense in 2010.

The following table depicts the amounts of depreciation and amortization expense from operations for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Depreciation and amortization	$	22,122	$	22,428	$	(306	)		(1.4	%)

Depreciation and amortization expense decreased by approximately ($0.3) million, or (1.4%), primarily due to the write-off of tenant improvements in connection with a lease termination in 2009 with no comparable activity in 2010.

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Other Income and Expenses

The following table depicts the amounts of equity in earnings of unconsolidated joint venture for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Equity in earnings of unconsolidated joint venture	$	303	$	309	$	(6	)		(1.9	%)

As of December 31, 2010, 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 both years ended December 31, 2010 and 2009, equity in earnings from the unconsolidated joint venture was approximately $0.3 million. The occupancy rate for the property owned by this joint venture at December 31, 2010 and 2009 was 100%.

The following table depicts the amounts of interest and dividend income for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Interest and dividend income	$	102	$	1,309	$	(1,207	)		(92.2	%)

Interest and dividend income decreased by approximately ($1.2) million, or (92.2%), from $1.3 million for the year ended December 31, 2009, to $0.1 million for the year ended December 31, 2010. The decrease in interest and dividend income resulted primarily from the accrual of approximately $1.0 million in 2009 related to the RPC litigation based on a court judgment (see Item 3. Legal Proceedings).

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Realized gain from investment	$	4,067		-	$	4,067			100.0	%
Unrealized gain from investment		-	$	5,011		(5,011	)		(100.0	%)
Total	$	4,067	$	5,011	$	(944	)		(18.8	%)

In 2010, we recorded a net realized and unrealized gain from investment in marketable securities of approximately $4.1 million. In 2009, we recorded 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.

The following table depicts the amounts of interest expense for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change			% Change
	(dollars in thousands)
Interest	$	20,068	$	22,117	$	(2,049	)		(9.3	%)
Interest (related parties)		988		765		223			29.2	%
Total	$	21,056	$	22,882	$	(1,826	)		(8.0	%)

Interest expense decreased by approximately ($2.0) million, or (9.3%), from $22.1 million for the year ended December 31, 2009, to $20.1 million for the year ended December 31, 2010. Interest expense decreased in 2010 primarily because in 2009 we accrued   approximately $2.4 million of interest expense for the RPC litigation and we accrued less in 2010. Interest expense (related parties) increased by approximately $0.2 million, or 29.2%, from $0.8 million for the year ended December 31, 2009, to $1.0 million for the year ended December 31, 2010. The increase in interest expense (related parties) was due to increased related party borrowings in 2010 compared to 2009.

Income (loss) from Discontinued Operations

The following table depicts the amounts of income (loss) from discontinued operations for the years ended December 31, 2010 and 2009.

	Year Ended December 31,
	2010			2009
	(dollars in thousands)
Net gain on disposal of discontinued operations	$	6,199			-
Net loss attributable to discontinued operations		(2,170	)	$	(1,863	)
Income (loss) from discontinued operations	$	4,029		$	(1,863	)

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We recognized total income (loss) from discontinued operations of approximately $4.0 million and ($1.9) million for the years ended December 31, 2010 and 2009, respectively.

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, 2010 and 2009.

	Year Ended December 31,
	2010		2009		$ Change		% Change
	(dollars in thousands)
Net income available to common stockholders	$	8,473	$	8,391	$	82		1.0	%
Net income attributable to noncontrolling interests		28,022		26,058		1,964		7.5	%
Total net income	$	36,495	$	34,449	$	2,046		5.9	%

As of December 31, 2010 and 2009, we owned a controlling general partner interest of 24.83%, 21.86%, 16.32% and 12.53% and 24.31%, 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 20.84% and 20.65% general partner interest in the operating partnerships, taken as a whole, on a consolidated weighted average basis as of December 31, 2010 and 2009, respectively. Net income available to common stockholders in 2010 increased by approximately $0.08 million, or 1.0%, from 2009. Net income attributable to noncontrolling interests in 2010 increased by approximately $2.0 million, or 7.5%, from 2009. The increase in net income attributable to common stockholders and noncontrolling interests primarily resulted from the gain on sale of one R&D property in 2010.

Noncontrolling interests represent the limited partners’ ownership interest of 79.16% and 79.35% in the operating partnerships, on a weighted average basis, as of December 31, 2010 and 2009, respectively.

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Changes in Financial Condition

Year Ended December 31, 2011

The most significant changes in our financial condition in 2011 resulted from the acquisition of one R&D property, the disposition of one R&D property, and the exchange of O.P. Units for shares of our common stock.

During 2011, we acquired one R&D property representing approximately 67,500 rentable square feet for a total gross purchase price of approximately $10.8 million. In addition to the property acquisition, we sold one R&D property consisting of approximately 38,600 rentable square feet for a total gross sale price of approximately $7.3 million. See Item 8, “Financial Statements and Supplementary Data – Note 6” for further discussion of these transactions.

Debt outstanding, including amounts due related parties, decreased by approximately ($11.9) million, or (3.4%), from $353.5 million as of December 31, 2010, to $341.6 million as of December 31, 2011. During 2011, we borrowed from the Berg Group and under our revolving line of credit, increased our revolving line of credit with the Heritage Bank of Commerce from $17.5 million to $19.0 million, and made recurring scheduled debt payments.

In 2011, four limited partners exchanged a total of 450,250 O.P. Units for 450,250 shares of our common stock pursuant to the exchange rights agreement, resulting in a reclassification of approximately $3.3 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, 2010

The most significant changes in our financial condition in 2010 resulted from the acquisition of one R&D property, the disposition of one R&D property, the exercise of stock options and the exchange of O.P. Units for shares of our common stock.

During 2010, we acquired one R&D property representing approximately 41,000 rentable square feet for a total gross purchase price of approximately $3.9 million. In addition to the property acquisition, we sold one R&D property consisting of approximately 78,000 rentable square feet for a total gross sale price of approximately $14.1 million. The proceeds were classified as restricted cash for use in tax-deferred property exchanges and were reflected on our consolidated balance sheet as restricted cash at December 31, 2010 (see Item 8, “Financial Statements and Supplementary Data – Note 6” for further discussion of this transaction).

Debt outstanding, including amounts due related parties, increased by approximately $2.6 million, or 0.7%, from $350.9 million as of December 31, 2009 to $353.5 million as of December 31, 2010. During 2010, we entered into a new loan with the Hartford Company, retired all short-term debt owed to the Berg Group and under our revolving line of credit, and made recurring scheduled debt payments.

In 2010, stock options to purchase 10,859 shares of our common stock were exercised at $6.14 per share. The total proceeds of approximately $0.07 million increased additional paid-in-capital.

In 2010, three limited partners exchanged a total of 254,700 O.P. Units for 254,700 shares of our common stock pursuant to the exchange rights agreement, resulting in a reclassification of approximately $1.7 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 2012, we anticipate operating cash flows from our property portfolio to remain unchanged compared with 2011, subject to the outcome of certain lease renewals, because we are still experiencing weak demand for our R&D properties in certain areas of the Silicon Valley, principally the south San Jose area, and have approximately 426,000 rentable square feet scheduled to expire in 2012. If we are unable to lease a significant portion of the space subject to expiring leases or currently available additional 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.

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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 improvements 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 2012. 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, long-term secured and unsecured indebtedness and the issuance of additional equity securities by us. We have the ability to meet short-term obligations or other liquidity needs based on our existing cash reserves. In 2012, we will be obligated to make payments totaling approximately $16.1 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.

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 was paid to us in early 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, 2011, our relationship with M&M Real Estate Control & Restructuring, LLC terminated in accordance with the agreement.

As of December 31, 2011, we were in compliance with loan covenants relating to the Allianz, Hartford, Northwestern mortgage loans and the Heritage Bank of Commerce (“HBC”) revolving line of credit.

Cash and cash equivalents decreased by approximately ($4.0) million from $4.0 million as of December 31, 2010, to $0 as of December 31, 2011. We had approximately $15.7 million of credit available under the HBC credit facility as of December 31, 2011.

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 2012. 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 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 2012, we expect to maintain our regular quarterly dividend payment rate to common stockholders and O.P. Unit holders at $0.13 per share. We will fund dividend payments 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 5, 2012, we paid dividends of $0.13 per share of common stock to all common stockholders of record as of December 30, 2011. On the same date, the operating partnerships paid a distribution of $0.13 per O.P. Unit to all holders of O.P. Units. Aggregate dividends and distributions for the quarter ended December 31, 2011, amounted to approximately $13.7 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.

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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, 2011, and provides information about our operating lease obligations that will impact our liquidity and cash flow in future periods.

	2012		2013		2014		2015		2016		Thereafter		Total
	(dollars in thousands)
Principal payments (1)	$	16,080	$	85,790	$	12,183	$	12,893	$	13,645	$	201,019	$	341,610
Interest payments-fixed rate debt (2)		19,133		15,056		13,527		12,817		12,066		45,410		118,009
Interest payments-variable rate debt (3)		132		105		-		-		-		-		237
Operating lease obligations (4)		120		30		-		-		-		-		150
Total	$	35,465	$	100,981	$	25,710	$	25,710	$	25,711	$	246,429	$	460,006

(1)   As of December 31, 2011, 99% of our debt was contractually fixed and 1% 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, 2011, 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, 2011, we had total indebtedness of approximately $341.6 million. A table listing our indebtedness as of December 31, 2011, is set forth in Item 8, “Financial Statements and Supplementary Data – Note 8.”

At December 31, 2011, 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 $9.02 per share on December 30, 2011) on a fully diluted basis, including the conversion of all O.P. Units into common stock, was approximately 26.4%. On December 30, 2011, the last trading day for the year, total market capitalization, including total debt outstanding, was approximately $1.30 billion. By comparison, on December 31, 2010 total debt as a percentage of market capitalization was 33.4% and total market capitalization, including total debt outstanding, was approximately $1.06 billion.

At December 31, 2011, the outstanding balance remaining under certain demand notes that we owed to the operating partnerships was approximately $2.6 million. The due date of the demand notes has been extended to September 30, 2013. 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 operations, 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,
	2011			2010			2009
	(dollars in thousands)
Cash flow provided by operating activities	$	72,481		$	81,768		$	56,072
Cash flow provided by (used in) investing activities	$	4,156		$	(6,738	)	$	(278	)
Cash flow used in financing activities	$	(80,625	)	$	(72,028	)	$	(54,808	)

Comparison of the year ended December 31, 2011 to the year ended December 31, 2010

Cash and cash equivalents were $0 at December 31, 2011 compared with approximately $4.0 at December 31, 2010.

Net cash provided by operating activities for the year ended December 31, 2011, was approximately $72.5 million compared with approximately $81.8 million for the year ended December 31, 2010. Cash provided by operating activities was lower in 2011 primarily because we received approximately $2.6 million from tenants for restoration costs for vacated properties in 2010 that did not recur in 2011.

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Cash provided by (used in) investing primarily consists of property acquisition, property disposition and improvements to our properties. Net cash used in investing activities was approximately $4.2 million for the year ended December 31, 2011, compared with approximately ($6.7) million for the year ended December 31, 2010. In 2011, we acquired one property for approximately $10.8 million, sold one property for a net total of approximately $7.2 million, incurred capital expenditures relating to real estate improvements of approximately $2.4 million and transferred restricted cash of approximately $6.8 million to our general cash account. We received cash of approximately $3.6 million and a note receivable in the amount of approximately $3.7 million for the property we sold. We also received approximately $7.1 million from a note receivable issued in 2010 for a property disposition. In 2010, we acquired one property for approximately $3.9 million, sold one property for a net total of approximately $13.8 million and incurred capital expenditures relating to real estate improvements of approximately $2.9 million. We received cash of approximately $6.8 million and a note receivable in the amount of approximately $7.1 million for the property we sold.

Net cash used in financing activities was approximately ($80.6) million for the year ended December 31, 2011, compared with approximately ($72.0) million for the year ended December 31, 2010. During 2011, financing activities included borrowing approximately $18.9 million from the Berg Group in short-term loans, borrowing approximately $3.3 million under our line of credit, payments of approximately $15.2 million for outstanding mortgage debt, payments of approximately $18.9 million to the Berg Group under short-term loans, payment of approximately $10.8 million to M&M Real Estate Control & Restructuring, LLC, payments of approximately $12.1 million to common stockholders as dividends and payments of approximately $45.8 million to O.P. Unit holders as distributions. During 2010, financing activities included borrowing $40 million under a new mortgage loan, borrowing approximately $53.0 million from the Berg Group in short-term loans, payments of approximately $14.4 million under our line of credit, payments of approximately $13.6 million for outstanding mortgage debt, payments of approximately $62.3 million to the Berg Group under short-term loans, payment of approximately $10.4 million to M&M Real Estate Control & Restructuring, LLC, payment of approximately $0.4 million in financing costs related to a new mortgage loan, payments of approximately $13.2 million to common stockholders as dividends and payments of approximately $50.7 million to O.P. Unit holders as distributions.

Comparison of the year ended December 31, 2010 to the year ended December 31, 2009

Cash and cash equivalents were approximately $4.0 million at December 31, 2010, compared with $1.0 at December 31, 2009.

Net cash provided by operating activities for the year ended December 31, 2010, was approximately $81.8 million compared with approximately $56.1 million for the year ended December 31, 2009. Cash provided by operating activities was higher in 2010 primarily due to approximately $16.2 million of gains from investments in marketable securities and $2.6 million received from tenants for restoration costs for vacated properties. In addition, in 2009 we used operating cash flow to deposit approximately $14.0 million with the clerk of the Santa Clara County Superior Court in the RPC litigation with no comparable activity in 2010.

Cash used in investing primarily consists of property acquisition, property disposition and improvements to our properties. Net cash used in investing activities was approximately ($6.7) million for the year ended December 31, 2010, compared with approximately ($0.3) million for the year ended December 31, 2009. In 2010, we acquired one property for approximately $3.9 million, sold one property for a net total of approximately $13.8 million and incurred capital expenditures relating to real estate improvements of approximately $2.9 million. We received cash of approximately $6.8 million and a note receivable in the amount of approximately $7.1 million for the property we sold. 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.

Net cash used in financing activities was approximately ($72.0) million for the year ended December 31, 2010, compared with approximately ($54.8) million for the year ended December 31, 2009. During 2010, financing activities included borrowing $40 million under a new mortgage loan, borrowing approximately $53.0 million from the Berg Group in short-term loans, payments of approximately $14.4 million under our line of credit, payments of approximately $13.6 million for outstanding mortgage debt, payments of approximately $62.3 million to the Berg Group under short-term loans, payment of approximately $10.4 million to M&M Real Estate Control & Restructuring, LLC, payment of approximately $0.4 million in financing costs related to a new mortgage loan, payments of approximately $13.2 million to common stockholders as dividends and payments of approximately $50.7 million to O.P. Unit holders as distributions. 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 mortgage 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.

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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, 2007 through December 31, 2011, the recurring tenant/building improvement costs and leasing commissions incurred with respect to new leases and lease renewals of the properties averaged approximately $5.2 million annually. We will have approximately 426,000 rentable square feet under expiring leases in 2012. We expect that the average cost of recurring tenant/building improvements and leasing commissions related to these properties and current vacant properties will be approximately $2.0 million in 2012. 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 leases, 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 operating 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, 2011, we had no investments in securities of other real estate investment trusts.

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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 assets, 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 maintain 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 were either rezoned for residential development resulting in a value greater than being used as an R&D property or we did not believe were likely to earn the type of return on assets that we seek.  We will continue to dispose of properties either rezoned for residential or under-performing 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.

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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, 2011. The current terms of our outstanding debt are described in Item 8, “Financial Statements and Supplementary Data – 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, 2011, 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, 2011, will be paid upon maturity.

	2012			2013			2014			2015			2016			Thereafter			Total		Fair Value
	(dollars in thousands)
Fixed Rate Debt:
Secured notes payable	$	16,080		$	82,485		$	12,183		$	12,893		$	13,645		$	201,019		$	338,305	$	357,260
Weighted average interest rate		5.78	%		5.78	%		5.78	%		5.78	%		5.78	%		5.78	%
Variable Rate Debt:
Secured debt		-		$	3,305			-			-			-			-		$	3,305
Weighted average interest rate		-			4.00	%		-			-			-			-

The fixed rate debt represented 99% and 100% and the variable rate debt represented 1% and 0% of all debt outstanding for the years ended December 31, 2011 and 2010, respectively.

All of our debt is denominated in United States dollars. The weighted average interest rate for the fixed rate debt was approximately 5.78% for the years ended December 31, 2011 and 2010. The increase in interest expense attributable to the average interest rate difference between 2011 and 2010 was approximately $0.08 million, which was a result of approximately $0.5 million recorded in 2011 related to the RPC litigation.

The primary market risk we face is the risk of interest rate fluctuations. 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. At December 31, 2011, we had approximately $3.3 million owed on the HBC revolving line of credit. As of December 31, 2011 and 2010, we did not have any derivative instruments.

The interest rate for the HBC revolving line of credit is the greater of LIBOR plus 1.75% or 4.00%. Since LIBOR rates are considerably low at the moment, a 1% increase or decrease in the LIBOR interest rate sensitive analysis would not be useful as it would not exceed 4.00%.

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Item 8.  Financial Statements and Supplementary Data

MISSION WEST PROPERTIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Report of IndependentRegistered Public Accounting Firm	46
Report of IndependentRegistered Public Accounting Firm on Internal Control over Financial Reporting	47
Consolidated Balance Sheets as of December 31, 2011 and 2010	48
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009	49
Consolidated Statements of Equity for the years ended December 31, 2011, 2010 and 2009	50
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009	51
Notes to Consolidated Financial Statements	52
Supplemental Financial Information	73
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2011	76
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2010	79

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Mission West Properties, Inc.:

We have audited the accompanying consolidated balance sheets of Mission West Properties, Inc. (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 2011. Our audits also included the financial statement schedules listed on the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules 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, assessing the accounting principles used and significant estimates made by management, and 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. as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mission West Properties, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2012, expressed an unqualified opinion.

\s\ Burr Pilger Mayer, Inc.

San Francisco, California

March 15, 2012

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

To the Board of Directors and Stockholders

Mission West Properties, Inc.:

We have audited Mission West Properties, Inc.’s (the Company) internal control over financial reporting as of December 31, 2011, 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 (Item 9A.(b)). 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 of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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 the 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 authorizations 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, 2011, 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 sheet as of December 31, 2011 and 2010, and the related consolidated statements of operations, equity, and cash flows of Mission West Properties, Inc. for each of the years in the three-year period ended December 31, 2011, and related financial statements schedules listed in the Index 15(a), and our report dated March 15, 2012, expressed an unqualified opinion.

\s\ Burr Pilger Mayer, Inc.

San Francisco, California

March 15, 2012

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MISSION WEST PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

ASSETS
	December 31,
	2011			2010
Investments in real estate:
Land	$	306,474		$	322,076
Buildings and improvements		745,962			790,424
Real estate related intangible assets		3,561			3,240
Total investments in properties		1,055,997			1,115,740
Accumulated depreciation and amortization		(229,211	)		(224,027	)
Assets held for sale, net		54,361			3,267
Net investments in properties		881,147			894,980
Investment in unconsolidated joint venture		3,557			3,830
Net investments in real estate		884,704			898,810
Cash and cash equivalents		-			3,988
Restricted cash		-			6,892
Deferred rent		16,650			17,941
Other assets, net		35,133			40,653
Total assets	$	936,487		$	968,284
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable	$	331,166		$	345,770
Mortgage note payable (related parties)		7,139			7,721
Revolving line of credit		3,305			-
Interest payable		1,606			1,659
Prepaid rent		5,836			6,526
Dividends and distributions payable		13,687			15,793
Accounts payable and accrued expenses		16,344			16,239
Security deposits		4,317			4,605
Total liabilities		383,400			398,313
Commitments and contingencies (Note 16)
Equity:
Stockholders’ equity :
Preferred stock, $.001 par value, 20,000,000 shares authorized,
none issued or outstanding		-			-
Common stock, $.001 par value, 200,000,000 shares authorized, 22,586,020
and 22,135,770 shares issued and outstanding at December 31, 2011 and 2010		23			22
Additional paid-in capital		175,900			172,568
Distributions in excess of accumulated earnings		(32,962	)		(30,520	)
Total stockholders’ equity		142,961			142,070
Noncontrolling interests in operating partnerships		410,126			427,901
Total equity		553,087			569,971
Total liabilities and equity	$	936,487		$	968,284

See notes to consolidated financial statements.

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MISSION WEST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

	Year Ended December 31,
	2011			2010			2009
Operating revenues:
Rental income	$	83,574		$	81,037		$	81,458
Tenant reimbursements		17,701			14,868			18,273
Other income, including lease terminations and settlements		3,581			2,590			3,708
Total operating revenues		104,856			98,495			103,439
Operating expenses:
Property operating and maintenance		11,174			13,020			13,432
Real estate taxes		10,980			12,084			12,678
General and administrative		2,378			2,219			2,336
Depreciation and amortization		22,839			22,122			22,428
Total operating expenses		47,371			49,445			50,874
Operating income		57,485			49,050			52,565
Other income (expenses):
Equity in earnings of unconsolidated joint venture		27			303			309
Interest and dividend income		515			102			1,309
Realized and unrealized gain from investment		-			4,067			5,011
Interest expense		(20,505	)		(20,068	)		(22,117	)
Interest expense – related parties		(631	)		(988	)		(765	)
Income from continuing operations		36,891			32,466			36,312
Discontinued operations:
Net gain on disposal of properties classified as discontinued operations		3,891			6,199			-
Net loss attributable to discontinued operations		(1,881	)		(2,170	)		(1,863	)
Income (loss) from discontinued operations		2,010			4,029			(1,863	)
Net income		38,901			36,495			34,449
Net income attributable to noncontrolling interests		(29,626	)		(28,022	)		(26,058	)
Net income available to common stockholders	$	9,275		$	8,473		$	8,391
Net income per share from continuing operations:
Basic	$	0.40		$	0.36		$	0.40
Diluted	$	0.39		$	0.35		$	0.39
Net income (loss) per share from discontinued operations:
Basic	$	0.01		$	0.03		$	(0.01	)
Diluted	$	0.01		$	0.03		$	(0.01	)
Net income per share to common stockholders:
Basic	$	0.41		$	0.39		$	0.39
Diluted	$	0.40		$	0.38		$	0.38
Weighted average shares of common stock (basic)		22,489,475			21,973,599			21,736,699
Weighted average shares of common stock (diluted)		22,917,552			22,121,724			21,923,104
Weighted average O.P. units		82,796,560			83,310,364			83,538,477

See notes to consolidated financial statements.

-49-

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			Noncontrolling Interests in Operating Partnerships			Total Equity
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
Net income		-		-		-		8,473			8,473			28,022			36,495
Dividends declared per common share        and O.P. Unit at $0.60 per share/unit		-		-		-		(13,209	)		(13,209	)		(49,962	)		(63,171	)
Joint ventures distributions		-		-		-		-			-			(710	)		(710	)
Issuance of common stock        upon O.P. Unit conversion		254,700		-		1,734		-			1,734			(1,734	)		-
Issuance of common stock upon option exercise		10,859		-		67		-			67			-			67
Amortization of stock-based compensation		-		-		161		-			161			-			161
Balance, December 31, 2010		22,135,770		22		172,568		(30,520	)		142,070			427,901			569,971
Net income		-		-		-		9,275			9,275			29,626			38,901
Dividends declared per common share        and O.P. Unit at $0.52 per share/unit		-		-		-		(11,717	)		(11,717	)		(43,033	)		(54,750	)
Joint ventures distributions		-		-		-		-			-			(1,092	)		(1,092	)
Issuance of common stock        upon O.P. Unit conversion		450,250		1		3,275		-			3,276			(3,276	)		-
Amortization of stock-based compensation		-		-		57		-			57			-			57
Balance, December 31, 2011		22,586,020	$	23	$	175,900	$	(32,962	)	$	142,961		$	410,126		$	553,087

See notes to consolidated financial statements.

-50-

MISSION WEST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

	Year Ended December 31,
	2011			2010			2009
Cash flows from operating activities:
Net income	$	38,901		$	36,495		$	34,449
Adjustments to reconcile net income to net cash provided by operating    activities:
Depreciation and amortization		23,843			23,751			24,110
Gain from disposal of properties classified as discontinued operations		(3,891	)		(6,199	)		-
Realized and unrealized gain from restricted investment		-			(4,067	)		(5,011	)
Dividend income from restricted investment		-			-			(726	)
Equity in earnings of unconsolidated joint venture		(27	)		(303	)		(309	)
Distributions from unconsolidated joint venture		300			300			250
Interest earned on restricted cash		-			(12	)		(94	)
Lease termination fee income related to restricted cash		10,865			10,381			10,864
Stock-based compensation		57			160			352
Other		-			9			-
Change in operating assets and liabilities:
Proceeds from restricted investment		-			16,211			3,646
Deferred rent		1,291			770			(870	)
Other assets		2,068			(2,158	)		(4,700	)
Interest payable		(53	)		86			68
Security deposits		(288	)		(244	)		(423	)
Prepaid rent		(690	)		(13	)		2,575
Accounts payable and accrued expenses		105			6,601			(8,109	)
Net cash provided by operating activities		72,481			81,768			56,072
Cash flows from investing activities:
Improvements to investments in real estate		(2,442	)		(2,841	)		(178	)
Purchase of office equipment		-			(39	)		-
Net proceeds from sale of properties		3,497			6,686			-
Acquisition of properties		(10,825	)		(3,853	)		-
Decrease (increase) in restricted cash		6,803			(6,691	)		(100	)
Proceeds received from note receivable		7,123			-			-
Net cash provided by (used in) investing activities		4,156			(6,738	)		(278	)
Cash flows from financing activities:
Proceeds from mortgage loan payable		-			40,000			-
Principal payments on mortgage notes payable		(14,604	)		(13,048	)		(12,090	)
Principal payments on mortgage notes payable (related parties)		(582	)		(540	)		(500	)
Proceeds from note payable (related parties)		18,852			53,025			39,420
Payment on note payable (related parties)		(18,852	)		(62,350	)		(39,420	)
Proceeds from note payable		-			-			22,000
Payment on note payable		(10,776	)		(10,381	)		-
Net borrowings (repayments) on revolving line of credit		3,305			(14,466	)		1,387
Debt issuance costs		(21	)		(457	)		-
Net proceeds from exercise of stock options		-			67			-
Distributions paid to noncontrolling interests		(45,846	)		(50,709	)		(50,775	)
Dividends paid to common stockholders		(12,101	)		(13,169	)		(14,830	)
Net cash used in financing activities		(80,625	)		(72,028	)		(54,808	)
Net (decrease) increase in cash and cash equivalents		(3,988	)		3,002			986
Cash and cash equivalents, beginning of year		3,988			986			-
Cash and cash equivalents, end of year	$	-		$	3,988		$	986

See notes to consolidated financial statements.

-51-

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. In late December 2011, the Company formed two additional operating partnerships and transferred certain R&D properties from two current operating partnerships into the two new operating partnerships through two separate partnership division transactions. The two transactions changed the nominal ownership of title to certain properties but did not modify the economic interests or rights of the Company or the limited partners in the operating partnerships. The Company is the sole general partner of the two new operating partnerships. There was no issuance of common shares associated with these transactions, and the number of O.P. Units issued in each of the new operating partnerships was fully offset by the cancellation of the same number O.P. Units of each respective predecessor operating partnership.

As of December 31, 2011, the Company owned a controlling general partner interest of 25.74%, 21.86%, 16.32%, 12.53%, 21.86% and 16.32% in Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II, Mission West Properties, L.P. III, Mission West Properties, L.P. IV and Mission West Properties, L.P. V, respectively, for a 21.36% 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, 2011, 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

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.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, allocation of purchase price relating to property acquisitions, accrued liabilities, and Mission West Properties, Inc.’s qualification as a REIT. The Company bases its estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.

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

-52-

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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.

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with current accounting guidance, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values.

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 net fair value of acquired in-place leases at December 31, 2011 and 2010 was approximately $2,013 and $553, respectively.

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. There were no above or below market component of acquired in-place leases as of December 31, 2011 and 2010.

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 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%. 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, 2011 and 2010.

-53-

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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.

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 had 13 properties classified as held for sale as of December 31, 2011, and one as of December 31, 2010.

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. As of December 31, 2011 and 2010, cash was approximately $0 and $3,988, respectively. The Company had no cash equivalents at December 31, 2011 and 2010.

Restricted Cash

Restricted cash totaled approximately $6,892 as of December 31, 2010. Of this amount, approximately $6,803 represents proceeds received from the 1325-1375 McCandless Drive property sale and earned interest income held in a separate cash account at a trust company for future use in tax-deferred exchanges and approximately $89 represents a balance the Company had consolidated due to the accounting provisions 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. In 2011, the Company transferred the entire balance from restricted cash to its general cash account because it did not pursue a tax-deferred exchange and its agreement with the variable interest entity terminated.

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 were considered restricted because they were 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, 2011 and 2010, the Company recorded net realized and unrealized gain of approximately $0 and $4,067, respectively, related to the sale of the securities and the increase in fair value of the marketable securities. As of December 31, 2011, the Company had no investments in marketable securities.

-54-

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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 for details and Note 22 for the application of this obligation by the Berg Group).

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.

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” 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. Provisions against “Deferred rent” 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 tenants’ 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, 2011, 2010 and 2009, no provision for federal income taxes has been included in the accompanying consolidated financial statements.

-55-

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

For the year ended December 31, 2011, the Company’s total dividends paid or payable to the stockholders represented approximately 95.4% ordinary income and 4.6% long-term capital gain for income tax purposes (unaudited). For the year ended December 31, 2010, the Company’s total dividends paid or payable to the stockholders represented approximately 83.7% ordinary income and 16.3% long-term capital gain for income tax purposes (unaudited). 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).

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 allocated 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, 2011, 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, 2011, the Company recorded approximately $57 of expense for share-based compensation relating to stock options.

In 2005, the 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 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 remain in effect for each key employee as long as they continue to be employed by the Company.

A new non-employee outside director was awarded 45,000 DERs when he joined the Company’s board of directors in 2008. As of December 31, 2011, there were a total of 275,000 DERs. The Company recorded DER compensation expense of approximately $143, $165 and $179 in 2011, 2010 and 2009, respectively.

Fair Value

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. In the second quarter of 2010, the Company sold all of its restricted investment in marketable securities. As of December 31, 2011, the Company did not have any financial assets where it had to measure the fair value.

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.

-56-

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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 arrangements. The fair value of the Company’s fixed rate debt at December 31, 2011, was approximately $357,260 compared with its carrying value of approximately $338,305. As of December 31, 2011, the Company did not have any financial instruments that were required to be recorded at fair value on a recurring basis.

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.

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 63 tenants at December 31, 2011, default by any major tenant could significantly impact the results of the consolidated total. One tenant, Microsoft Corporation, accounted for approximately 15.8%, 16.0% and 15.8% of the Company’s total cash rental income for the years ended December 31, 2011, 2010 and 2009, respectively. Cash rental income from Microsoft Corporation was approximately $13,494, $13,179 and $12,873 for the years ended December 31, 2011, 2010 and 2009, respectively. Future minimum rents from this tenant are approximately $36,920. One other tenant, Apple, Inc., accounted for approximately 13.8%, 11.3% and 9.4% of the Company’s total cash rental income for the years ended December 31, 2011, 2010 and 2009, respectively. During 2011, 12 of the Company’s total tenants relocated or ceased operations.

New Accounting Pronouncements

There are currently no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial condition and results of operations in future periods.

3.   DEFERRED RENT

The following table represents activity in the allowance against deferred rent, net for the years ended December 31, 2011, 2010 and 2009.

	Beginning Balance		Provision Against Revenue			Charge-off			Ending Balance
	(dollars in thousands)
Year ended December 31, 2011	$	250	$	(1,226	)	$	(1,226	)	$	250
Year ended December 31, 2010	$	250	$	1,245		$	1,245		$	250
Year ended December 31, 2009	$	250	$	312		$	312		$	250

4.   STOCK TRANSACTIONS

As of December 31, 2011 and 2010, approximately $2,626 and $2,444 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, 2013. 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.

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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 $1,000, 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 $1,000. There were no O.P. Units tendered for cash by the Company in 2011 and 2010.

There were no stock option exercises in 2011.

During the year ended December 31, 2010, stock options to purchase 10,859 shares of the Company’s common stock were exercised at $6.14 per share. Total proceeds to the Company were approximately $67.

There were no stock option exercises in 2009.

In 2011, 2010 and 2009, 450,250, 254,700 and 2,122,000 O.P. Units were exchanged for 450,250, 254,700 and 2,122,000 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 78.64% and 79.16%, on a consolidated weighted average basis, of the ownership interests in the real estate operations of the Company as of December 31, 2011 and 2010, 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, 2011, 2010 and 2009, income associated with the noncontrolling interests held by third parties of the three consolidated joint ventures was approximately $414, $356 and $407, respectively.

6.   REAL ESTATE

Property Acquisitions

On July 1, 2011, the Company acquired an almost fully leased office/R&D building comprised of approximately 67,500 rentable square feet at 5941 Optical Court in San Jose, California from the Berg Group, a related party, for approximately $10,825 by paying $2,000 in cash and issuing an unsecured short-term note payable in the amount of approximately $8,825 with an interest rate of 3.50%, which was due October 31, 2011. As of December 31, 2011, the note payable had been fully repaid. The purchase price of 5941 Optical Court was allocated to long-lived assets and the value of the in-place leases. The in-place leases were valued at fair market so there were no intangible assets allocated to the above-or-below market lease value. The Company recorded approximately $2,440 of the purchase price as real estate related intangible asset in the accompanying consolidated balance sheet for the value of the in-place leases. The intangible asset will be amortized over the applicable remaining lease terms.

On January 8, 2010, the Company acquired a fully leased office/R&D building comprised of approximately 41,400 rentable square feet at 1040-1050 La Avenida Street in Mountain View, California from an unrelated party for approximately $3,853 in cash. The purchase price of 1040-1050 La Avenida Street was allocated to long-lived assets. The in-place lease was valued at fair market so there was no intangible asset allocated to above-or-below market lease value.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

Property Dispositions

On October 28, 2011, the Company disposed of one R&D property located at 1425-1455 McCandless Drive in Milpitas, California consisting of approximately 39,000 rentable square feet. A total net gain of approximately $3,891 was recognized and classified as discontinued operations on the total sales price of $7,320. The buyer issued a promissory note to the Company in the amount of $3,660 with an interest rate of 6.00% per annum. The principal amount of the note, together with accrued interest, will be due and payable on October 30, 2012.

On October 28, 2010, the Company disposed of one R&D property located at 1325-1375 McCandless Drive in Milpitas, California consisting of approximately 78,000 rentable square feet. A total net gain of approximately $6,199 was recognized and classified as discontinued operations on the total sales price of $14,123. The buyer issued a promissory note to the Company in the amount of $7,123 with an interest rate of 3.00% per annum. The principal amount of the note, together with accrued interest, was due and paid on October 30, 2011.

7.   VARIABLE INTEREST ENTITY

Effective January 1, 2010, the Company adopted the modified accounting provisions pertaining to variable interest entity (“VIE”) under ASC Topic 810 “Consolidation.” The VIE accounting provisions modify the existing quantitative guidance used in determining the primary beneficiary of a VIE by requiring entitiesto 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 provisions require 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. 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 provisions require disclosures about VIEs that a company is not required to consolidate, but in which it has a significant variable interest.

Under the provisions, 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 obligations 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, received $849 from July 2009 through June 2010, received $881 from July 2010 through June 2011 and received $915 from July 2011 through December 2011. Based upon the accounting provisions 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. The arrangement with M&M terminated on December 31, 2011, and the VIE consolidation will cease effective January 1, 2012.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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. The Company re-evaluated its interest in M&M. Based on the evaluation performed, management concluded that there is no change from its initial assessment and continues to consolidate the entity. Effective January 1, 2012, the Company will cease to consolidate M&M as a VIE because its arrangement with M&M terminated on December 31, 2011.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

8.   DEBT

The following table sets forth certain information regarding debt outstanding as of December 31, 2011 and 2010.

Debt Description	Collateral Properties	Balance at December 31,				Maturity Date	Interest Rate
		2011		2010
		(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	$	3,305		-	September 2013			(1)
Mortgage Notes Payable (related parties) (2) :	5300-5350 Hellyer Avenue, San Jose, CA		7,139	$	7,721	June 2013		7.65	%
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 I”)	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		104,834		108,262	October 2018		6.21	%
Hartford Life Insurance Company (4) Hartford Life and Accident Insurance Company (collectively known as the “Hartford Loan II”)	5830-5870 Hellyer Avenue, San Jose, CA 5750 Hellyer Avenue, San Jose, CA 255 Caspian Drive, Sunnyvale, CA 5970 Optical Court, San Jose, CA 3301 Olcott Street, Santa Clara, CA		38,663		39,741	September 2030		6.05	%
Northwestern Mutual Life Insurance Co. (5)	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		69,034		73,357	February 2013		5.64	%
Allianz Life Insurance Company (I) (6)	5900 Optical Court, San Jose, CA		20,269		21,233	August 2025		5.56	%
Allianz Life Insurance Company (II) (6)	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		98,366		103,177	August 2025		5.22	%
			331,166		345,770
Total		$	341,610	$	353,491

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

(1)   The interest rate on the Heritage Bank of Commerce (“HBC”) 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, 2011 and 2010 was 4.00%. 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, 2011, 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 2030. The weighted average interest rate for the mortgage notes payable was 5.78% at December 31, 2011 and 2010.

(3)   The Hartford Loan I 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 I contains certain customary covenants as defined in the loan agreement. As of December 31, 2011, the Company was in compliance with these loan covenants.

(4)   The Hartford Loan II is payable in monthly installments of approximately $288, which includes principal (based upon a 20-year amortization) and interest.  Costs and fees incurred with obtaining this loan aggregated approximately $457, which were deferred and amortized over the loan period. The Hartford Loan II contains certain customary covenants as defined in the loan agreement. As of December 31, 2011, the Company was in compliance with these loan covenants.

(5)   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, 2011, the Company was in compliance with these loan covenants.

(6)   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, 2011, the Company was in compliance with these loan covenants.

During 2011, the Company issued two short-term notes payable to the Berg Group in connection with a property acquisition and quarterly dividend distributions. The interest rates on the two notes were 3.50% and LIBOR plus 1.75%, respectively, and total interest expense incurred in connection with those short-term notes payable was approximately $60. The aggregate loan amount totaled approximately $18,792. The Company repaid all of the notes and accrued interest for total repayments of approximately $18,852 to the Berg Group in 2011.

During 2010, the Company issued multiple short-term notes payable to the Berg Group in connection with quarterly dividend distributions. The interest rate on the notes was LIBOR plus 1.75%, and total interest expense incurred in connection with those short-term notes payable was approximately $375. The aggregate loan amount totaled approximately $53,025, which included accrued interest. The Company repaid all of the notes, all accrued interest and the balance outstanding at December 31, 2009 of $9,325, for total repayments of approximately $62,350 to the Berg Group in 2010.

Scheduled principal payments on debt as of December 31, 2011 are as follows:

	Total Debt (Including Related Parties)
	(dollars in thousands)
2012	$	16,080
2013		85,790
2014		12,183
2015		12,893
2016		13,645
Thereafter		201,019
Total	$	341,610

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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 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, 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 $1,000 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 $1,000. There were no O.P. Units tendered for cash by the Company in 2011 and 2010.

During 2011, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.52 per common share and O.P. Unit for total dividends/distributions of approximately $54,749, including $13,687 payable in January 2012. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $39,876.

During 2010, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.60 per common share and O.P. Unit for total dividends/distributions of approximately $63,171, including $15,793 payable in January 2011. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $46,048.

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.

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 647,000 shares have been transferred as of December 31, 2011; 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, of which 1,674,535 and 1,084,535 shares of common stock were available for future option or award grants under the 2004 Plan as of December 31, 2011 and 2010, respectively.

The Company’s stock-based compensation expense was approximately $57, $67 and $352 for the years ended December 31, 2011, 2010 and 2009, respectively.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

Determining Fair Value of Stock Options

The fair value of stock options granted during the years ended December 31, 2010 and 2009 were determined by the Company using the Black-Scholes option pricing model and assumptions of certain components within the model. These components consist of the expected dividend, expected volatility, risk-free interest rate, expected term and forfeiture rate.

In April 2011, stock options to purchase 590,000 shares of common stock held by employees and directors of the Company expired.

In February 2010, stock options to purchase 171,000 shares of common stock were granted to an employee. Of this 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 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 $6.99 per share. The estimated fair value of the options granted was $0.43 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 8.58%, volatility of 22.57%, risk free rates of 2.40% and an expected life of 5.5 years. Forfeiture rate was estimated to be 0%. All options were granted at fair market value on the date of grant and were approved by the Compensation Committee of the board of directors.

In January 2009, the Compensation Committee of the board of directors approved the rescission of 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 years. Forfeiture rate was estimated to be 0%. 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 expired.

The following table shows the activity and detail for the 2004 Plan for each of the three years in the period ended December 31, 2011.

		Shares Available	Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
		For Grant	Outstanding	Per Share	in Years	($ in thousands)
Balance, December 31, 2008		1,180,535	3,332,500	$9.62	4.0	$224
	Options granted	(500,000)	500,000	$5.99
	Options forfeited	575,000	(575,000)	$10.70
Balance, December 31, 2009		1,255,535	3,257,500	$8.87	3.7	$738
	Options granted	(171,000)	171,000	$6.99
	Options exercised	-	(10,859)	$6.14
Balance, December 31, 2010		1,084,535	3,417,641	$8.79	2.8	$554
	Options forfeited	590,000	(590,000)	$10.00
Balance, December 31, 2011		1,674,535	2,827,641	$8.54	2.4	$3,678
Vested and expected to vest – December 31, 2011			2,827,641	$8.54	2.4	$3,678
Exercisable – December 31, 2011			2,739,319	$8.58	2.3	$3,678

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

The following table summarizes information regarding options outstanding for the 2004 Plan at December 31, 2011:

	Options Outstanding			Options Exercisable		Options Not Exercisable
Range of Exercise Prices	Options	Weighted Average Remaining Contractual Life in Years	Exercise Price	Options	Exercise Price	Options	Exercise Price
$5.99	500,000	3.17	$5.99	481,250	$5.99	18,750	$5.99
$6.14	694,141	2.92	$6.14	655,183	$6.14	38,958	$6.14
$6.99	171,000	4.08	$6.99	163,875	$6.99	7,125	$6.99
$9.51	760,000	2.00	$9.51	744,167	$9.51	15,833	$9.51
$11.36	52,500	2.58	$11.36	44,844	$11.36	7,656	$11.36
$12.09	650,000	1.08	$12.09	650,000	$12.09	-	$12.09
$5.99 to $12.09	2,827,641	2.36	$8.54	2,739,319	$8.58	88,322	$7.23

As of December 31, 2011, total compensation cost related to unvested stock-based awards granted, but not yet recognized, was approximately $3, net of estimated forfeitures. The cost will be amortized on a straight-line basis over a weighted-average remaining period of 8.3 months. Future option grants will increase the amount of compensation expense that will be recorded.

None of the options granted are contingent upon the attainment of performance goals or subject to other restrictions. As of December 31, 2011 and 2010, “in-the-money” outstanding options to purchase 1,300,308 and 896,329 shares of common stock, respectively, were exercisable.

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.

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, receives 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 shares 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.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

An initial total of 4,638,089 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 December 31, 2011, 2010 and 2009, the Company recognized approximately $127, $125 and $125, respectively, of expense for employer contributions made in connection with this Plan.

11.   NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) 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.

	Year Ended December 31,
	2011		2010		2009
	(dollars in thousands, except per share data)
Numerator:
Income from continuing operations	$	8,947	$	7,815	$	8,695
Income (loss) from discontinued operations		328		658		(304	)
Net income available to common stockholders	$	9,275	$	8,473	$	8,391
Denominator:
Weighted average shares of common stock (basic)		22,489,475		21,973,599		21,736,699
Effect of dilutive securities:
Incremental shares from assumed stock options exercise		428,077		148,125		186,405
Weighted average shares of common stock (diluted)		22,917,552		22,121,724		21,923,104
Per share data:
Basic net income (loss) per share:
Net income to common stockholders before discontinued operations	$	0.40	$	0.36	$	0.40
Discontinued operations	$	0.01	$	0.03	$	(0.01	)
Net income available to common stockholders	$	0.41	$	0.39	$	0.39
Diluted net income (loss) per share:
Net income to common stockholders before discontinued operations	$	0.39	$	0.35	$	0.39
Discontinued operations	$	0.01	$	0.03	$	(0.01	)
Net income available to common stockholders	$	0.40	$	0.38	$	0.38

Outstanding options to purchase 1,462,500 shares in 2011 and 2,223,500 shares in 2010 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 which are exchangeable at the unit holder’s option, subject to certain restrictions on conversions, for shares of common stock on a one-for-one basis have been excluded from the diluted net income per share calculation. The total number of O.P. Units outstanding at December 31, 2011, 2010 and 2009 were 82,700,015, 83,150,265 and 83,404,965, respectively.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

12.   OTHER INCOME

Other income from continuing operations was approximately $3,581, $2,590 and $3,708 for the years ended December 31, 2011, 2010 and 2009, respectively. For the year ended December 31, 2011, management fee income, incentive to lessee adjustment, environmental remediation payment, termination fee and miscellaneous income accounted for approximately $1,009, $672, $1,434, $93 and $373, respectively, of other income. For the year ended December 31, 2010, litigation proceeds, prior tenant bankruptcy settlement, management fee income, and miscellaneous income accounted for approximately $1,285, $140, $975 and $190, respectively, of other income. 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, $969 and $352, respectively, of other income.

13.   RELATED PARTY TRANSACTIONS

As of December 31, 2011, the Berg Group owned 75,769,684 O.P. Units of the total 82,700,015 O.P. Units issued and outstanding. As of December 31, 2010, the Berg Group owned 75,803,684 O.P. Units of the total 83,150,265 O.P. Units issued and outstanding. The Berg Group’s interest in the Company represents approximately 74.0% of the Company as of December 31, 2011 and 2010, assuming conversion of the O.P. Units into common shares of the Company.

Property Acquisition

In 2011, the Company acquired an almost fully leased office/R&D building comprised of approximately 67,500 rentable square feet at 5941 Optical Court in San Jose, California from the Berg Group for approximately $10,825 by paying $2,000 in cash and issuing an unsecured short-term note payable in the amount of approximately $8,825 with an interest rate of 3.50%, which was due October 31, 2011. As of December 31, 2011, the note payable had been fully repaid.

There were no property acquisitions from the Berg Group in 2010.

Debt with the Berg Group

As of December 31, 2011 and 2010, debt in the amount of approximately $7,139 and $7,721, 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 $571, $613 and $653 for the years ended December 31, 2011, 2010 and 2009, respectively.

During 2011, the Company issued two short-term notes payable to the Berg Group in connection with a property acquisition and quarterly dividend distributions. The interest rates on the two notes were 3.50% and LIBOR plus 1.75%, respectively. The aggregate loan amount totaled approximately $18,792. The Company repaid approximately $18,852 to the Berg Group, which includes accrued interest. For the year ended December 31, 2011, interest expense incurred in connection with those short-term notes payable was approximately $60.

During 2010, 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 $53,025. The Company repaid approximately $62,350 to the Berg Group, which includes accrued interest and the balance outstanding at December 31, 2009 of $9,325. For the year ended December 31, 2010, interest expense incurred in connection with those short-term notes payable was approximately $375.

Transfer of Interest in Consolidated Joint Venture to Berg Group

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.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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.

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 of the board of directors, 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 $0.9 million, $1.0 million and $0.8 million in 2011, 2010 and 2009, respectively. As of December 31, 2011, accumulated distributions from profits of Hellyer LP totaling approximately $7.9 million were accrued and distributed to BBE. Due to the uncertainty created by the litigation over Hellyer LP, since October 2003, the Company has recorded such distributions as an account receivable from BBE, which has been included in “Other assets” on the Company’s consolidated balance sheets, with an offsetting account payable to RPC.

In September 2009, the superior court issued a final decision in the Mission West Properties, L.P. v. Republic Properties Corporation litigation and entry of judgment in favor of RPC that RPC is and at all times was a partner in Hellyer LP and was entitled to receive all past distributions from profits that were paid to BBE plus accrued interest. The Company filed an appeal. 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 million. Of this amount, $9.3 million represented the amount owed to RPC and $4.7 million represented a deposit to appeal the court’s final decision in the litigation. The Company accrued approximately $4.4 million in interest expense since September 2009 on the amount of past distributions that would be payable to RPC by Hellyer LP based on the amount of the judgment at the legal rate of interest of 10%.  In addition, 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 $1.3 million in interest receivable due from BBE. The $1.3 million interest income accrual was calculated at an interest rate of LIBOR plus 1.25%. The Company’s appeal was unsuccessful, and in December 2011, the Company finalized the details with its legal counsel to arrange for the transfer of funds held by the California Superior Court to pay off the judgment plus accrued interest, and coordinate with the Independent Directors Committee of the Board of Directors and BBE on the transfer of the former RPC interest from BBE to RPC. The amount of approximately $9.2 million, consisting of the aggregate distributions and accrued interest, is owed by BBE to the Company. In February 2012, the $9.2 million was applied towards the acquisition of properties from the Berg Group. See note 22 for details of the acquisition.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

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

In July 1999, Toeniskoetter Breeding, Inc. (“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 of the board of directors 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 venture 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 $1,800. The Independent Directors Committee of the board of directors 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 $53,600. The Independent Directors Committee of the board of directors 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 $2,800, 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 $1,400 from the sale. The transaction was approved by the Independent Directors Committee of the board of directors. 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 $8,450. The total gain on the sale was approximately $876 of which $438 was the Company’s share. In November 2008, TBI-MWP sold two R&D properties with approximately 311,200 rentable square feet for approximately $65,000. The total gain on the sale was approximately $40,943 of which approximately $20,471 million was the Company’s share. TBI-MWP currently owns one fully leased R&D building totaling approximately 155,500 rentable square feet.

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

During the years ended December 31, 2011, 2010 and 2009, 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 $1,469, $1,101 and $1,118 in rental income in 2011, 2010 and 2009, 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 which rent from related party tenants would be excluded in determining compliance with REIT qualification tests.

Berg Group Commitment to Complete Future Building in Connection with an Acquisition from the Berg Group under the Berg Land Holdings Option Agreement

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 of the board of directors. See Note 22 for the application of this obligation by the Berg Group.

Leasing and Overhead Reimbursements Provided by Berg Controlled Entity

The Company currently leases office space owned by Berg & Berg Enterprises, Inc. for the Company’s headquarters. Rental amount and overhead reimbursements paid to Berg & Berg Enterprises, Inc. were $120 for each year ended December 31, 2011, 2010 and 2009.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

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 2022, 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, 2011, excluding tenant reimbursements of expenses, are as follows:

Year	Minimum Rent
	(dollars in thousands)
2012	$77,455
2013	74,011
2014	63,090
2015	39,656
2016	34,399
Thereafter	71,575
Total	$360,186

15.   SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was approximately $20,783, $20,736 and $22,507 for the years ended December 31, 2011, 2010 and 2009, respectively.

Amounts of approximately $13,687, $15,793 and $15,791 were accrued for dividends and distributions to common stockholders and O.P. Unit holders for the years ended December 31, 2011, 2010 and 2009, respectively.

Amounts of approximately $41,410, $46,048 and $54,154 were paid to the Berg Group for distributions declared to O.P. Unit holders during the years ended December 31, 2011, 2010 and 2009, respectively.

For the years ended December 31, 2011, 2010 and 2009, 450,250, 254,700 and 2,122,000 O.P. Units were exchanged for 450,250, 254,700 and 2,122,000 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 $3,276, $1,734 and $15,844 for the years ended December 31, 2011, 2010 and 2009, respectively, based on the market closing price on the day of the transactions.

In connection with the property disposition of 1425-1455 McCandless Drive in 2011, the Company received a promissory note from the buyer in the amount of $3,660 with an interest rate of 6.00% per annum. The principal amount of the note, together with accrued interest, will be due and payable on October 30, 2012.

In connection with the property disposition of 1325-1375 McCandless Drive in 2010, the Company received a promissory note from the buyer in the amount of $7,123 with an interest rate of 3.00% per annum. The principal amount of the note, together with accrued interest, was due and payable on October 30, 2011.

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.

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, 2011.

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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 the estimated fair value of these agreements is minimal. Accordingly, the Company has recorded no liabilities for these agreements as of December 31, 2011.

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 occupants of the properties, by the condition of properties in the vicinity of the properties, or by third parties unrelated to the Company.

17.   REAL ESTATE ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

The Company follows the accounting provisions 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, 2011, 2010 and 2009. 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.

In 2011, the Company sold one R&D property for a total sales price of approximately $7,320 resulting in a net gain of approximately $3,891.

In 2010, the Company sold one R&D property for a total sales price of approximately $14,123 resulting in a net gain of approximately $6,199.

As of December 31, 2011, there were 13 properties under contract to be sold which would qualify as assets held for sale.

Results of operations for these properties for the years ended December 31, 2011, 2010 and 2009 are as follows:

	Year Ended December 31,
	2011			2010			2009
	(dollars in thousands)
Revenues:
Rental income	$	26		$	715		$	1,063
Tenant reimbursements		(34	)		273			459
Other income		161			29			48
Total operating revenues		153			1,017			1,570
Expenses:
Property operating, maintenance and real estate taxes		1,030			1,558			1,751
Depreciation		1,004			1,629			1,682
Total operating expenses		2,034			3,187			3,433
Net loss attributable to discontinued operations		(1,881	)		(2,170	)		(1,863	)
Net gain on disposal of discontinued operations		3,891			6,199			-
Income (loss) from discontinued operations	$	2,010		$	4,029		$	(1,863	)

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

18.   ACQUISITION-RELATED INTANGIBLE ASSETS

Amortization expense related to in-place leases of approximately $981, $708 and $637 was recorded for the years ended December 31, 2011, 2010 and 2009, respectively.

Details of real estate related intangible assets at December 31, 2011 and 2010 are as follows:

	December 31,
	2011			2010
	(dollars in thousands)
Amortizable intangible assets:
Real estate related intangible assets	$	3,561		$	3,240
Accumulated amortization		(1,548	)		(2,687	)
Net real estate related intangible assets	$	2,013		$	553

The estimated aggregate amortization expense for the real estate related intangible assets for the remaining fiscal years as of December 31, 2011, is as follows:

Year	Estimated In-place Lease Amortization (expense)
	(dollars in thousands)
2012	$1,204
2013	176
2014	138
2015	138
2016	138
Thereafter	219
Total	$2,013

19.   FAIR VALUE OF RESTRICTED INVESTMENT IN MARKETABLE SECURITIES

In accordance with the accounting provisions 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.”

As of December 31, 2011, the Company had no restricted investment in marketable securities. The Company’s restricted investment in marketable securities on December 31, 2009, was classified as trading securities. The marketable securities are classified as Level 1 of the fair value hierarchy in accordance with the accounting provisions for fair value measurements and disclosuresand thus measured at fair value using quoted market prices for identical instruments in active markets from an independent third party source. 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.

In the second quarter of 2010, the Company sold all of its restricted investment in marketable securities for a net total of approximately $15,913. The Company realized a net cash gain of approximately $9,601, which included approximately $298 in cash dividends received during the holding period. For the year ended December 31, 2010, the Company recorded net realized and unrealized gain of approximately $4,067.

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 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 year ended December 31, 2009, the Company recorded net unrealized gain of approximately $5,011 related to the increase in fair value of the marketable securities, which was reported in unrealized gain from investment in the Company’s consolidated statement of operations.

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MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

 (Dollars in thousands, except per share data)

20.   INCOME TAXES

In accordance with ASC Topic 740 "Income Taxes," the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that result in a material impact on the Company's financial position or results of operation. The Company recognizes the tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities. The prior three years' income tax returns are subject to review by the Internal Revenue Service. The Company will recognize potential interest and penalties related to uncertain tax positions, if any, as a component of the provision for income taxes.

21.   SUPPLEMENTAL FINANCIAL INFORMATION  (Unaudited)

Quarterly financial information for the year ended December 31, 2011 (1) is as follows:

	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	(Unaudited)
	(dollars in thousands)
Rental income	$	21,723	$	20,354	$	20,889	$	20,608
Operating income	$	15,760	$	13,368	$	13,407	$	14,950
Net income	$	10,395	$	8,062	$	8,031	$	10,403
Net income available to common stockholders	$	2,400	$	1,879	$	1,875	$	3,121
Per share data:
Basic net income per share	$	0.11	$	0.08	$	0.08	$	0.14
Diluted net income per share	$	0.11	$	0.08	$	0.08	$	0.14
Weighted average shares of common stock (basic)		22,288,103		22,495,605		22,584,770		22,585,110
Weighted average shares of common stock (diluted)		22,405,276		22,756,006		22,878,981		22,013,187

Quarterly financial information for the year ended December 31, 2010 (1) is as follows:

	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	(Unaudited)
	(dollars in thousands)
Rental income	$	20,635	$	20,489	$	20,426	$	19,487
Operating income	$	13,842	$	13,306	$	11,381	$	10,522
Net income	$	10,675	$	10,563	$	6,075	$	5,153
Net income available to common stockholders	$	2,458	$	2,460	$	1,370	$	2,185
Per share data:
Basic net income per share	$	0.11	$	0.11	$	0.06	$	0.10
Diluted net income per share	$	0.11	$	0.11	$	0.06	$	0.10
Weighted average shares of common stock (basic)		21,881,189		21,957,654		21,976,679		22,076,694
Weighted average shares of common stock (diluted)		22,056,805		22,123,527		22,109,391		22,198,946

(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.

22.   SUBSEQUENT EVENTS

On January 5, 2012, the Company paid dividends of $0.13 per share of common stock to all common stockholders of record as of December 30, 2011. On the same date, the operating partnerships paid a distribution of $0.13 per O.P. Unit to all O.P. Unit holders. Aggregate dividends and distributions amounted to approximately $13,687.

On January 9, 2012, the Company disposed of three R&D properties located at 1680-1690 McCandless Drive, 1740-1768 McCandless Drive and 1810-1830 McCandless Drive in Milpitas, California consisting of approximately 165,000 rentable square feet. A total net gain of approximately $8,350 will be recognized and classified as discontinued operations on the total sales price of $21,780. The buyer issued an unsecured promissory note to the Company in the amount of $18,780 with an interest rate of 0% per annum. The total sales price encompasses the sum of the following amounts: 1) the down payment price of $3,000; 2) yearly payments of $3,000 on the anniversary of the closing date for four years; and 3) on the fifth year anniversary of the closing date, the buyer will pay the amount remaining of the unpaid portion of the total sales price.

-73-

MISSION WEST PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands, except per share data)

On February 1, 2012, the Company acquired three vacant R&D buildings located at 5901, 5921 and 5961 Optical Court in San Jose, California from the Berg Group consisting of approximately 202,500 rentable square feet. The total acquisition price for these properties was $18,000. The Company also acquired approximately ten acres of raw land at Hellyer Avenue and Embedded Way for approximately $5,313 and nine acres of raw land at Hellyer Avenue and Piercy Road for approximately $4,877 from the Berg Group. The combined purchase price for the three R&D buildings and raw land totaled approximately $28,190. The Company acquired these properties by offsetting the purchase price with approximately $9,217, the amount the Berg Group owes to the Company from the outcome of the Hellyer Avenue Limited Partnership litigation and approximately $7,494, the amount the Berg Group is committed to pay toward the construction of an R&D building in connection with the Company’s 2001 acquisition of 245 Caspian Drive in Sunnyvale, California. The Company issued an unsecured short-term note payable for the remaining amount of approximately $11,479 with an interest rate of LIBOR plus 1.75%, which is due July 15, 2012, with an option to extend another six months. As of March 13, 2012, the note payable had been fully repaid.

On February 14, 2012, the Company disposed of three R&D properties located at 1625-1657 McCandless Drive, 1725-1745 McCandless Drive and 1815-1845 McCandless Drive in Milpitas, California consisting of approximately 112,000 rentable square feet. Only 36.04% of property 1815-1845 McCandless Drive was sold in this phase and the remaining 63.96% will be sold in the second phase at a later date. A total net gain of approximately $4,434 will be recognized and classified as discontinued operations on the total sales price of $13,613. The Company received net proceeds of approximately $13,547 in cash.

-74-

INTENTIONALLY BLANK

-75-

MISSION WEST PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation and Amortization
December 31, 2011
(dollars in thousands)
				Initial Cost			Total Cost
						Cost
					Buildings	Subsequent to		Buildings		Accumulated
			December 31, 2011		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	$7,139	$5,742	$11,442		$5,742	$11,442	$17,184	$3,325	05/00	M
10401-10411 Bubb Road	Cupertino	A		633	3,078		633	3,078	3,711	1,041	07/98	M
45365 Northport Loop	Fremont			2,447	5,711	$11	2,447	5,722	8,169	1,618	10/00	M
45738 Northport Loop	Fremont	F		891	4,338	5	891	4,343	5,234	1,469	07/98	M
4050 Starboard Drive	Fremont	F		1,329	6,467	8	1,329	6,475	7,804	2,187	07/98	M
3501 W. Warren Ave/Fremont Blvd	Fremont			1,866	9,082	1,366	1,866	10,448	12,314	4,424	07/98	M
48800 Milmont Blvd	Fremont			1,013	4,932		1,013	4,932	5,945	1,666	07/98	M
4750 Patrick Henry Drive	Santa Clara	H		1,604	7,805	405	1,604	8,210	9,814	3,051	07/98	M
3520 Bassett Street	Santa Clara	D		1,104	5,371		1,104	5,371	6,475	1,813	07/98	M
3530 Bassett Street	Santa Clara	B,D		849	4,133		849	4,133	4,982	1,396	07/98	M
5850-5870 Hellyer Avenue	San Jose	F		2,787	6,502	173	2,787	6,675	9,462	2,275	11/98	M
5750 Hellyer Avenue	San Jose	F		3,266	3,354	2,798	3,266	6,152	9,418	2,603	08/01	M
800 Embedded Way	San Jose	L		1,794	-		1,794	-	1,794	-	03/00	-
5500 Hellyer Avenue	San Jose	F		4,735	12,485	1,545	4,735	14,030	18,765	4,044	02/01	M
5550 Hellyer Avenue	San Jose	F		3,261	3,478	3,755	3,261	7,233	10,494	3,505	06/01	M
5400 Hellyer Avenue	San Jose			3,238	5,007	215	3,238	5,222	8,460	1,657	07/00	M
5325 Hellyer Avenue	San Jose	H		4,684	10,230	40	4,684	10,270	14,954	2,862	01/01	M
875 Embedded Way	San Jose	H		4,866	5,822	2,529	4,866	8,351	13,217	2,530	01/02	M
5905-5965 Silver Creek Valley Road	San Jose			8,437	17,316	46	8,437	17,362	25,799	4,567	07/01	M
5905-5965 Silver Creek Valley Road	San Jose			3,438	2,727		3,438	2,727	6,165	699	10/01	M
5845 Hellyer Avenue	San Jose			6,090	5,029		6,090	5,029	11,119	548	09/07	M
855 Embedded Way	San Jose			3,289	6,521	60	3,289	6,581	9,870	1,799	05/01	M
1065-1105 La Avenida Street	Mountain View			46,832	109,275	65	46,832	109,340	156,172	34,850	04/99	M
1040-1050 La Avenida Street	Mountain View			3,652	200		3,652	200	3,852	200	01/10	M
1875 Charleston Road	Mountain View	N		-	1,870	421	-	2,291	2,291	302	04/06	M
1750 Automation Parkway	San Jose	G		4,789	11,174	315	4,789	11,489	16,278	3,590	07/99	M
1756 Automation Parkway	San Jose	G		4,378	10,216	704	4,378	10,920	15,298	3,407	01/00	M
1762 Automation Parkway	San Jose	G		4,804	12,224	1,332	4,804	13,556	18,360	4,439	04/00	M
1768 Automation Parkway	San Jose	H		8,195	19,121	218	8,195	19,339	27,534	5,517	12/00	M
255 Caspian Drive	Sunnyvale	F		3,491	7,160	1,658	3,491	8,818	12,309	3,152	04/00	M
245 Caspian Drive	Sunnyvale			5,894	-		5,894	-	5,894	-	04/01	-
5941 Optical Court	San Jose	Q		1,808	9,017	31	1,808	9,048	10,856	798	7/11	M
5981 Optical Court	San Jose	F		4,054	14,938	298	4,054	15,236	19,290	3,514	01/08	M
5970 Optical Court	San Jose	F		2,758	8,395		2,758	8,395	11,153	1,679	12/03	M
5900 Optical Court	San Jose			3,634	12,677	723	3,634	13,400	17,034	3,094	07/02	M
2630 Orchard Parkway	San Jose			2,932	5,863	22	2,932	5,885	8,817	1,464	03/02	M
2610 Orchard Parkway	San Jose	K		2,615	5,231		2,615	5,231	7,846	1,286	03/02	M
55 West Trimble Road	San Jose	K		4,435	8,869		4,435	8,869	13,304	2,181	03/02	M
2001 Walsh Avenue	Santa Clara	E,G,J		4,610	3,887		4,610	3,887	8,497	855	04/03	M
2880 Scott Blvd	Santa Clara	E,H,J		14,501	22,555	471	14,501	23,026	37,527	5,133	04/03	M
2890 Scott Blvd	Santa Clara	E,H,J		3,081	9,696	25	3,081	9,721	12,802	2,140	04/03	M
2770-2800 Scott Blvd	Santa Clara	E,H		7,138	7,075	170	7,138	7,245	14,383	1,708	04/03	M
2300 Central Expressway	Santa Clara	E,G,J		2,390	2,459	50	2,390	2,509	4,899	566	04/03	M
2220 Central Expressway	Santa Clara	E,G,J		3,305	3,427	816	3,305	4,243	7,548	1,421	04/03	M
2330 Central Expressway	Santa Clara	E,G		3,673	3,932	1,237	3,673	5,169	8,842	1,674	04/03	M
233 South Hillview Drive	Milpitas	F,O		3,335	8,701		3,335	8,701	12,036	1,269	03/06	M
2251 Lawson Lane	Santa Clara			1,952	9,498	622	1,952	10,120	12,072	3,589	07/98	M
1230 East Arques	Sunnyvale	F		540	2,628	39	540	2,667	3,207	930	07/98	M
1250 East Arques	Sunnyvale	F		1,335	6,499		1,335	6,499	7,834	2,194	07/98	M
20400 Mariani Avenue	Cupertino			1,670	8,125	946	1,670	9,071	10,741	3,562	07/98	M
10500 De Anza Blvd	Cupertino			7,666	37,304		7,666	37,304	44,970	12,594	07/98	M
20605-20705 Valley Green Drive	Cupertino	G		3,490	16,984		3,490	16,984	20,474	5,736	07/98	M
10300 Bubb Road	Cupertino	F		635	3,090		635	3,090	3,725	1,044	07/98	M
10440 Bubb Road	Cupertino			434	2,112	114	434	2,226	2,660	829	07/98	M
10460 Bubb Road	Cupertino	H		994	4,838	1,279	994	6,117	7,111	2,199	07/98	M
1135 Kern Avenue	Sunnyvale			407	1,982		407	1,982	2,389	672	07/98	M
450 National Avenue	Mountain View			611	2,973	95	611	3,068	3,679	1,097	07/98	M
3301 Olcott Street	Santa Clara	F		1,846	8,984	1,878	1,846	10,862	12,708	3,317	07/98	M
2800 Bayview Avenue	Fremont			1,070	5,205	60	1,070	5,265	6,335	1,819	07/98	M

-76-

MISSION WEST PROPERTIES, INC.

Schedule III

Real Estate and Accumulated Depreciation and Amortization

December 31, 2011

(dollars in thousands)

				Initial Cost			Total Cost
Property Name	City		December 31, 2011 Encumbrances	Land	Buildings and Improvements	Cost Subsequent to Construction/ Acquisition	Land	Buildings and  Improvements	Total	Accumulated Depreciation & Amortization	Date of Acquisition	Depreciable Life
5521 Hellyer Avenue	San Jose			4,534	9,650	230	4,534	9,880	14,414	2,116	02/05	M
6850 Santa Teresa Blvd	San Jose	H		377	1,836	819	377	2,655	3,032	1,143	07/98	M
6810 Santa Teresa Blvd	San Jose	H		2,567	5,991	844	2,567	6,835	9,402	2,615	03/99	M
140-160 Great Oaks Blvd	San Jose			1,402	6,822	754	1,402	7,576	8,978	2,824	07/98	M
6541 Via del Oro/6385 San Ignacio	San Jose	G		1,039	5,057	163	1,039	5,220	6,259	1,825	07/98	M
6311-6351 San Ignacio Avenue	San Jose	F		6,246	30,396	170	6,246	30,566	36,812	10,435	07/98	M
6320-6360 San Ignacio Avenue	San Jose	G		2,616	12,732	439	2,616	13,171	15,787	4,546	07/98	M
75 E. Trimble Road/2610 N. First St	San Jose			3,477	16,919	1,457	3,477	18,376	21,853	6,014	07/98	M
2904 Orchard Parkway	San Jose	F,P		4,704	11,992		4,704	11,992	16,696	1,901	02/08	M
3236 Scott Blvd	Santa Clara	F		1,234	6,005		1,234	6,005	7,239	2,029	07/98	M
1212 Bordeaux Lane	Sunnyvale	F		2,250	10,948		2,250	10,948	13,198	3,698	07/98	M
1500-1810 McCandless Drive	Milpitas			11,507	54,096	1,306	11,507	55,402	66,909	18,887	07/98	M
1600 Memorex Drive	Santa Clara	I		1,221	5,940	11	1,221	5,951	7,172	1,993	07/98	M
1688 Richard Avenue	Santa Clara	I		1,248	2,913	6	1,248	2,919	4,167	988	09/98	M
1700 Richard Avenue	Santa Clara	I		1,727	4,030		1,727	4,030	5,757	1,254	08/99	M
Morgan Hill Land	Morgan Hill			25,543	-		25,543	-	25,543	-	03/07	-
Morgan Hill Land	Morgan Hill			2,297	-		2,297	-	2,297	-	04/07	-
300 Montague Expressway	Milpitas			2,609	2,499		2,609	2,499	5,108	276	04/07	M
337 Trade Zone Blvd	Milpitas			2,264	2,168		2,264	2,168	4,432	239	04/07	M
324-368 Montague Expressway	Milpitas			2,968	2,843		2,968	2,843	5,811	314	04/07	M
3506-3510 Bassett Street	Santa Clara	D		943	4,591	182	943	4,773	5,716	1,698	07/98	M
3540-3544 Bassett Street	Santa Clara	F,D		1,565	7,616	261	1,565	7,877	9,442	2,692	07/98	M
3550 Bassett Street	Santa Clara	F,D		1,079	5,251	33	1,079	5,284	6,363	1,809	07/98	M
3560 Bassett Street	Santa Clara	F,D		1,075	5,233	8	1,075	5,241	6,316	1,776	07/98	M
3570-3580 Bassett Street	Santa Clara	F,D		1,075	5,233		1,075	5,233	6,308	1,769	07/98	M
Hartford Loans		F	143,497
Northwestern Mutual Life Insurance Company		G	69,034
Allianz Loans		H	118,635
Heritage Bank of Commerce Line of Credit		I	3,305
Total (R)			$341,610	$323,884	$769,775	$33,228	$323,884	$803,003	$1,126,887	$245,741
Properties Held For Sale:
1500-1810 McCandless Drive	Milpitas			$9,569	$45,970		$9,569	$45,970	$55,539	$15,700	07/98
300 Montague Expressway	Milpitas			2,609	2,499		2,609	2,499	5,108	276	04/07
337 Trade Zone Blvd	Milpitas			2,264	2,168		2,264	2,168	4,432	240	04/07
324-368 Montague Expressway	Milpitas			2,968	2,843		2,968	2,843	5,811	314	04/07
Total				$17,410	$53,480		$17,410	$53,480	$70,890	$16,530
(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.
(C) 50% 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 $143,497 Hartford loans - full amount of loan shown at the bottom of the schedule.
(G) Encumbered by the $69,034 Northwestern Mutual Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.
(H) Encumbered by the $118,635 Allianz loans - full amount of loan shown at the bottom of the schedule.
(I) Encumbered by the $3,305 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 were 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 were 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.

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MISSION WEST PROPERTIES, INC.

Schedule III

Real Estate and Accumulated Depreciation and Amortization

December 31, 2011

(dollars in thousands)

(N) Purchase price allocated to real estate related intangible assets amounted to $745. The amount was fully amortized in 2010 and the asset cost and its related accumulated amortization were removed from the accounts.

(O) Purchase price allocated to real estate related intangible assets amounted to $1,374. The amount was fully amortized in 2011 and the asset cost and its related accumulated amortization were removed from the accounts.

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

(Q) Purchase price allocated to real estate related intangible assets amounted to $2,440.

(R) These real estate and accumulated depreciation totals are inclusive of properties held for sale.

-78-

MISSION WEST PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation and Amortization
December 31, 2010
(dollars in thousands)
				Initial Cost			Total Cost
						Cost
					Buildings	Subsequent to		Buildings		Accumulated
			December 31, 2010		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	$7,721	$5,742	$11,442		$5,742	$11,442	$17,184	$3,039	05/00	M
10401-10411 Bubb Road	Cupertino	A		633	3,078		633	3,078	3,711	963	07/98	M
45365 Northport Loop	Fremont			2,447	5,711	$11	2,447	5,722	8,169	1,475	10/00	M
45738 Northport Loop	Fremont	F		891	4,338	5	891	4,343	5,234	1,360	07/98	M
4050 Starboard Drive	Fremont	F		1,329	6,467	8	1,329	6,475	7,804	2,025	07/98	M
3501 W. Warren Ave/Fremont Blvd	Fremont			1,866	9,082	1,366	1,866	10,448	12,314	4,166	07/98	M
48800 Milmont Blvd	Fremont			1,013	4,932		1,013	4,932	5,945	1,543	07/98	M
4750 Patrick Henry Drive	Santa Clara	H		1,604	7,805	405	1,604	8,210	9,814	2,855	07/98	M
3520 Bassett Street	Santa Clara	D		1,104	5,371		1,104	5,371	6,475	1,679	07/98	M
3530 Bassett Street	Santa Clara	B,D		849	4,133		849	4,133	4,982	1,293	07/98	M
5850-5870 Hellyer Avenue	San Jose	F		2,787	6,502	131	2,787	6,633	9,420	2,086	11/98	M
5750 Hellyer Avenue	San Jose	F		3,266	3,354	2,798	3,266	6,152	9,418	2,173	08/01	M
800 Embedded Way	San Jose	L		1,794	-		1,794	-	1,794	-	03/00	-
5500 Hellyer Avenue	San Jose	F		4,735	12,485	1,545	4,735	14,030	18,765	3,534	02/01	M
5550 Hellyer Avenue	San Jose	F		3,261	3,478	3,755	3,261	7,233	10,494	2,659	06/01	M
5400 Hellyer Avenue	San Jose			3,238	5,007	215	3,238	5,222	8,460	1,531	07/00	M
5325 Hellyer Avenue	San Jose	H		4,684	10,230	40	4,684	10,270	14,954	2,606	01/01	M
875 Embedded Way	San Jose	H		4,866	5,822	2,529	4,866	8,351	13,217	2,068	01/02	M
5905-5965 Silver Creek Valley Road	San Jose			8,437	17,316	46	8,437	17,362	25,799	4,124	07/01	M
5905-5965 Silver Creek Valley Road	San Jose			3,438	2,727		3,438	2,727	6,165	631	10/01	M
5845 Hellyer Avenue	San Jose			6,090	5,029		6,090	5,029	11,119	419	09/07	M
855 Embedded Way	San Jose			3,289	6,521	60	3,289	6,581	9,870	1,640	05/01	M
1065-1105 La Avenida Street	Mountain View			46,832	109,275	65	46,832	109,340	156,172	32,116	04/99	M
1040-1050 La Avenida Street	Mountain View			3,652	200		3,652	200	3,852	100	01/10	M
1875 Charleston Road	Mountain View	N		-	2,615		-	2,615	2,615	967	04/06	M
1750 Automation Parkway	San Jose	G		4,789	11,174	315	4,789	11,489	16,278	3,303	07/99	M
1756 Automation Parkway	San Jose	G		4,378	10,216	704	4,378	10,920	15,298	3,083	01/00	M
1762 Automation Parkway	San Jose	G		4,804	12,224	1,332	4,804	13,556	18,360	3,947	04/00	M
1768 Automation Parkway	San Jose	H		8,195	19,121	218	8,195	19,339	27,534	5,039	12/00	M
255 Caspian Drive	Sunnyvale	F		3,491	7,160	1,658	3,491	8,818	12,309	2,849	04/00	M
245 Caspian Drive	Sunnyvale			5,894	-		5,894	-	5,894	-	04/01	-
5981 Optical Court	San Jose	F		4,054	14,938	298	4,054	15,236	19,290	2,634	01/08	M
5970 Optical Court	San Jose	F		2,758	8,395		2,758	8,395	11,153	1,469	12/03	M
5900 Optical Court	San Jose			3,634	12,677	83	3,634	12,760	16,394	2,777	07/02	M
2630 Orchard Parkway	San Jose			2,932	5,863	22	2,932	5,885	8,817	1,317	03/02	M
2610 Orchard Parkway	San Jose	K		2,615	5,231		2,615	5,231	7,846	1,156	03/02	M
55 West Trimble Road	San Jose	K		4,435	8,869		4,435	8,869	13,304	1,959	03/02	M
2001 Walsh Avenue	Santa Clara	E,G,J		4,610	3,887		4,610	3,887	8,497	758	04/03	M
2880 Scott Blvd	Santa Clara	E,H,J		14,501	22,555	471	14,501	23,026	37,527	4,522	04/03	M
2890 Scott Blvd	Santa Clara	E,H,J		3,081	9,696	25	3,081	9,721	12,802	1,894	04/03	M
2770-2800 Scott Blvd	Santa Clara	E,H		7,138	7,075	170	7,138	7,245	14,383	1,502	04/03	M
2300 Central Expressway	Santa Clara	E,G,J		2,390	2,459	50	2,390	2,509	4,899	494	04/03	M
2220 Central Expressway	Santa Clara	E,G,J		3,305	3,427	816	3,305	4,243	7,548	1,242	04/03	M
2330 Central Expressway	Santa Clara	E,G		3,673	3,932	1,062	3,673	4,994	8,667	1,506	04/03	M
233 South Hillview Drive	Milpitas	F,O		3,335	10,076		3,335	10,076	13,411	2,358	03/06	M
2251 Lawson Lane	Santa Clara			1,952	9,498	622	1,952	10,120	12,072	3,227	07/98	M
1230 East Arques	Sunnyvale	F		540	2,628	39	540	2,667	3,207	864	07/98	M
1250 East Arques	Sunnyvale	F		1,335	6,499		1,335	6,499	7,834	2,032	07/98	M
20400 Mariani Avenue	Cupertino			1,670	8,125	946	1,670	9,071	10,741	3,176	07/98	M
10500 De Anza Blvd	Cupertino			7,666	37,304		7,666	37,304	44,970	11,661	07/98	M
20605-20705 Valley Green Drive	Cupertino	G		3,490	16,984		3,490	16,984	20,474	5,311	07/98	M
10300 Bubb Road	Cupertino	F		635	3,090		635	3,090	3,725	967	07/98	M
10440 Bubb Road	Cupertino			434	2,112	114	434	2,226	2,660	777	07/98	M
10460 Bubb Road	Cupertino	H		994	4,838	1,279	994	6,117	7,111	2,049	07/98	M
1135 Kern Avenue	Sunnyvale			407	1,982		407	1,982	2,389	623	07/98	M
450 National Avenue	Mountain View			611	2,973	95	611	3,068	3,679	992	07/98	M
3301 Olcott Street	Santa Clara	F		1,846	8,984	1,876	1,846	10,860	12,706	2,901	07/98	M
2800 Bayview Avenue	Fremont			1,070	5,205	60	1,070	5,265	6,335	1,689	07/98	M

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MISSION WEST PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation and Amortization
December 31, 2010
(dollars in thousands)
				Initial Cost			Total Cost
						Cost
					Buildings	Subsequent to		Buildings		Accumulated
			December 31, 2010		and	Construction/		and		Depreciation	Date of	Depreciable
Property Name	City		Encumbrances	Land	Improvements	Acquisition	Land	Improvements	Total	& Amortization	Acquisition	Life
5521 Hellyer Avenue	San Jose			4,534	9,650	112	4,534	9,762	14,296	1,768	02/05	M
6850 Santa Teresa Blvd	San Jose	H		377	1,836	819	377	2,655	3,032	1,073	07/98	M
6810 Santa Teresa Blvd	San Jose	H		2,567	5,991	772	2,567	6,763	9,330	2,350	03/99	M
140-160 Great Oaks Blvd	San Jose			1,402	6,822	754	1,402	7,576	8,978	2,641	07/98	M
6541 Via del Oro/6385 San Ignacio	San Jose	G		1,039	5,057	163	1,039	5,220	6,259	1,671	07/98	M
6311-6351 San Ignacio Avenue	San Jose	F		6,246	30,396	170	6,246	30,566	36,812	9,675	07/98	M
6320-6360 San Ignacio Avenue	San Jose	G		2,616	12,732	439	2,616	13,171	15,787	4,219	07/98	M
75 E. Trimble Road/2610 N. First St	San Jose			3,477	16,919	516	3,477	17,435	20,912	5,378	07/98	M
2904 Orchard Parkway	San Jose	F,P		4,704	11,992		4,704	11,992	16,696	1,405	02/08	M
3236 Scott Blvd	Santa Clara	F		1,234	6,005		1,234	6,005	7,239	1,879	07/98	M
1212 Bordeaux Lane	Sunnyvale	F		2,250	10,948		2,250	10,948	13,198	3,424	07/98	M
1350-1810 McCandless Drive	Milpitas			12,259	57,770	1,306	12,259	59,076	71,335	18,947	07/98	M
1600 Memorex Drive	Santa Clara	I		1,221	5,940	11	1,221	5,951	7,172	1,844	07/98	M
1688 Richard Avenue	Santa Clara	I		1,248	2,913	6	1,248	2,919	4,167	915	09/98	M
1700 Richard Avenue	Santa Clara	I		1,727	4,030		1,727	4,030	5,757	1,154	08/99	M
Morgan Hill Land	Morgan Hill			25,543	-		25,543	-	25,543	-	03/07	-
Morgan Hill Land	Morgan Hill			2,297	-		2,297	-	2,297	-	04/07	-
300 Montague Expressway	Milpitas			2,609	2,499		2,609	2,499	5,108	229	04/07	M
337 Trade Zone Blvd	Milpitas			2,264	2,168		2,264	2,168	4,432	199	04/07	M
324-368 Montague Expressway	Milpitas			2,968	2,843		2,968	2,843	5,811	261	04/07	M
3506-3510 Bassett Street	Santa Clara	D		943	4,591	182	943	4,773	5,716	1,579	07/98	M
3540-3544 Bassett Street	Santa Clara	F,D		1,565	7,616	261	1,565	7,877	9,442	2,483	07/98	M
3550 Bassett Street	Santa Clara	F,D		1,079	5,251	33	1,079	5,284	6,363	1,678	07/98	M
3560 Bassett Street	Santa Clara	F,D		1,075	5,233	8	1,075	5,241	6,316	1,646	07/98	M
3570-3580 Bassett Street	Santa Clara	F,D		1,075	5,233		1,075	5,233	6,308	1,638	07/98	M
Hartford Loans		F	148,003
Northwestern Mutual Life Insurance Company		G	73,357
Allianz Loans		H	124,410
Heritage Bank of Commerce Line of Credit		I	-
Total (Q)			$353,491	$322,828	$766,552	$30,786	$322,828	$797,338	$1,120,166	$225,186
Property Held For Sale:
1425-1455 McCandless Drive	Milpitas			$752	$3,674		$752	$3,674	$4,426	$1,159	07/98
(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.
(C) 50% of this property’s ownership is held by an affiliated party since September 2000.
(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 $148,003 Hartford loans - full amount of loan shown at the bottom of the schedule.
(G) Encumbered by the $73,357 Northwestern Mutual Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.
(H) Encumbered by the $124,410 Allianz loans - full amount of loan shown at the bottom of the schedule.
(I) Encumbered by the $0 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. The amount was fully amortized in 2010 and the asset cost and its related accumulated amortization were removed from the accounts.
(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.
(Q) These real estate and accumulated depreciation totals are inclusive of a property held for sale.

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MISSION WEST PROPERTIES, INC.
NOTE TO SCHEDULE III
December 31, 2011, 2010 and 2009
(dollars in thousands)
1. Reconciliation of real estate and accumulated depreciation and amortization:
	2011 (a)			2010 (a)			2009
Investments in properties:
Balance at beginning of year	$	1,120,166		$	1,123,800		$	1,123,622
Additions		13,267			6,693			178
Dispositions		(4,426	)		(10,327	)		-
Reclassification		(2,119	)		-			-
Balance at end of year	$	1,126,888		$	1,120,166		$	1,123,800
Accumulated depreciation and amortization:
Balance at beginning of year	$	225,186		$	204,153		$	180,043
Additions		23,833			23,751			24,110
Dispositions		(1,159	)		(2,718	)		-
Reclassification		(2,119	)		-			-
Balance at end of year	$	245,741		$	225,186		$	204,153
Net investments in properties	$	881,147		$	894,980		$	919,647

(a)   The years 2011 and 2010 amounts are inclusive of properties held for sale.

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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, 2011, 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 accumulated 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, 2011. 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 testing 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, 2011.

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 an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2011, as stated in their report, which is included under Item 8, above.

(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 2011 that has materially affected, or is reasonably likely to material affect, our internal control over financial reporting.

Item 9B.   Other Information

None.

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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 2012 annual stockholders’ meeting.

We have adopted a Code of Business Conduct and Ethics for Employees, Executive Officers and Directors that applies to all of our employees and directors. We have posted this Code of Business Conduct and Ethics on the Company’s website at www.missionwest.com.

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 2012 annual stockholders’ meeting.

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 2012 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 2012 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 2012 annual stockholders’ meeting.

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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, 2011 and 2010.

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).

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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 15, 2012	By: /s/ Carl E. Berg
	Carl E. Berg
	Chief Executive Officer
	(Principal Executive Officer)
Date: March 15, 2012	By: /s/ Wayne N. Pham
	Wayne N. Pham
	Vice President of Finance
	(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	Chairman of the Board, Chief Executive Officer and Director	March 15, 2012
Carl E. Berg
/s/ William A. Hasler	Director	March 15, 2012
William A. Hasler
/s/ Lawrence B. Helzel	Director	March 15, 2012
Lawrence B. Helzel
/s/ Raymond V. Marino	President, Chief Operating Officer and Director	March 15, 2012
Raymond V. Marino
/s/ Martin S. Roher	Director	March 15, 2012
Martin S. Roher

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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)
10.1.5	Agreement of Limited Partnership of Mission West Properties, L.P. IV (25)
10.1.6	Agreement of Limited Partnership of Mission West Properties, L.P. V (25)
10.1.7	Partnership Division Agreement for Mission West Properties, L.P. I and Mission West Properties, L.P. IV (25)
10.1.8	Partnership Division Agreement for Mission West Properties, L.P. II and Mission West Properties, L.P. V (25)
10.2	Exchange Rights Agreement between Mission West Properties and the Limited Partners (2b)
10.2.1	Amendment to Exchange Rights Agreement between Mission West Properties and the Limited Partners (25)
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 to Acquisition Agreement, dated as of July 1, 1998 (1)
10.4.3	Form of Partnership Interest Purchase Demand Note (1)
10.4.4	Second Amendment to Acquisition Agreement, dated as of December 30, 2011 (25)
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)
10.12	Lease Agreement with Apple Computer, Inc. (4a)
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)
10.16	Hartford Fixed Rate Term Loan Agreement II (23)
10.16.1	Hartford Life Insurance Company Promissory Note II (23)
10.16.2	Hartford Life and Accident Insurance Company Promissory Note II (23)
10.16.3	Hartford-Mission West Properties, L.P. Deed of Trust, Security Agreement and Fixture Filing II (23)
10.16.4	Hartford-Mission West Properties, L.P. I Deed of Trust, Security Agreement and Fixture Filing II (23)
10.16.5	Hartford Carveout Indemnity Agreement II (23)
10.16.6	Hartford Environmental Indemnity Agreement II (23)
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)

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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)
10.26	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) (Terminated)
10.29.1	Berg Group Promissory Note, dated January 7, 2010 (21) (Terminated)
10.29.2	Berg Group Promissory Note, dated April 8, 2010 (21) (Terminated)
10.29.3	Berg Group Promissory Note, dated July 8, 2010 (22) (Terminated)
10.29.4	Berg Group Promissory Note, dated October 6, 2011 (24) (Terminated)
10.29.5	Berg Group Promissory Note, dated January 5, 2012 (25) (Terminated)
10.29.6	Berg Group Promissory Note, dated February 1, 2012 (25)
10.30	Mission West Properties, L.P. Continuing Guaranty (13)
10.31	Mission West Properties, L.P. 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)
10.46*	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) (Terminated)
10.56.2	Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated June 5, 2009 (19) (Terminated)
10.56.3	Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated August 20, 2009 (20) (Terminated)
10.56.4	Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated October 13, 2009 (20) (Terminated)
10.56.5	Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated September 1, 2011 (24)
10.56.6	Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated October 31, 2011 (24)
10.57	M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 14, 2009 (19) (Terminated)

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10.58	M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 21, 2009 (19) (Terminated)
10.59	M&M Real Estate Control & Restructuring, LLC Promissory Note, dated July 1, 2009 (19) (Terminated)
10.60	M&M Real Estate Control & Restructuring, LLC Promissory Note, dated October 2, 2009 (20) (Terminated)
10.61	M&M Real Estate Control & Restructuring, LLC Promissory Note, dated October 23, 2009 (20) (Terminated)
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
101+	XBRL (eXtensive Business Reporting Language). The following financial materials from Mission West Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.
*	Management contract or compensatory plan or arrangement
+	As provided in Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
(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).

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(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. 001-34000).
(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. 001-34000).
(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. 001-34000).
(21)	Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on May 10, 2010 (Commission File No. 001-34000).
(22)	Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on August 9, 2010 (Commission File No. 001-34000).
(23)	Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on November 9, 2010 (Commission File No. 001-34000).
(24)	Incorporated herein by reference to the same-numbered exhibit to the quarterly report on Form 10-Q filed on November 9, 2011 (Commission File No. 001-34000).
(25)	Incorporated herein by reference to the same-numbered exhibit to the annual report on Form 10-K for 2011 filed on March 15, 2012 (Commission File No. 001-34000).

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EX-10.1.5

EXHIBIT 10.1.5

AGREEMENT OF LIMITED PARTNERSHIP

OF

MISSION WEST PROPERTIES, L.P. IV

This AGREEMENT OF LIMITED PARTNERSHIP OF MISSION WEST PROPERTIES, L.P. IV (this “Agreement”), dated as of December 21, 2011, is entered into by and among Mission West Properties, Inc., a Maryland corporation (the “Company” or the “General Partner”) and the limited partners whose names are set forth on Appendix I attached hereto (as it may be amended from time to time).

WHEREAS, Mission West Properties, L.P. IV (the “Partnership”) has been organized as a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware by filing a certificate of limited partnership with the Secretary of State of the State of Delaware on December 22, 2011 and certain properties listed in Appendix I have been contributed to the Partnership;

WHEREAS, pursuant to the terms of a Partnership Division Agreement dated as of December 21, 2011 (the “Division Agreement”), and the performance of the transactions contemplated thereby, the partnership units in the Partnership have been distributed to the Company and the limited partners in redemption of certain partnership units in Mission West Properties I, L.P. the Company is becoming the sole general partner in the Partnership, and the limited partners are being admitted as the holders of units of partnership interests in the Partnership, which partnership interests are identical to the partnership interests held by the Company and the limited partners in Mission West Properties, L.P. I as set forth on Appendix II, as follows:

Partner	Partnership Interests Mission West Properties L.P. I (%)	Partnership Interests Mission West Properties L.P. IV (%)
Mission West Properties, Inc.	21.86 %	21.86 %
Carl E. Berg	63.30 %	63.30 %
Clyde J. Berg	9.25 %	9.25 %
1981 Kara Ann Berg Trust,Clyde J. Berg, Trustee	5.59 %	5.59 %

and

WHEREAS, it is the intent of the parties to this Agreement that the effect of the division and creation and distribution of the Partnership pursuant to the Division Agreement, and this Agreement shall be so construed, such that the relative rights, interests and obligations of the Partners among themselves shall be unaffected as a result of such transactions and shall be the same as they were under the limited partnership agreement of the predecessor-in-interest Mission West Properties, L.P. I.

NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows:

ARTICLE 1.DEFINED TERMS.

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the following terms used in this Agreement.

1.1“ACT” the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute.

1.2“ACQUISITION AGREEMENT” means the agreement dated as of May 14, 1998, as amended as of July 1, 1998, and December 30, 2011 among the Partnership, the other partnerships comprising the Operating Partnership, all of the partners therein, and the Company concerning the acquisition of the Berg Properties, the Acquired Properties and the Pending Development Projects by the Operating Partnership, the Company’s investment in and admission to the Operating Partnership as sole general partner, and the rights and options of the limited partners in the Operating Partnership to tender L.P. Units or acquire shares of Common Stock under certain circumstances.

1.3“ADDITIONAL LIMITED PARTNER” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.3 hereof and who is shown as such on the books and records of the Partnership.

1.4“ADJUSTED CAPITAL ACCOUNT DEFICIT” means with respect to any Partner, the negative balance, if any, in such Partner’s Capital Account as of the end of any relevant fiscal year, determined after giving effect to the following adjustments:

(a)credit to such Capital Account any portion of such negative balance which such Partner (i) is treated as obligated to restore to the Partnership pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or (ii) is deemed to be obligated to restore to the Partnership pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and

(b)debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations.

1.5“ADJUSTED CONTRIBUTION” means the Capital Contributions of any Partner reduced by the total distributions to such Partner from Capital Events occurring subsequent to the Closing Date under the Division Agreement.  For purposes of this Agreement, the initial Capital Contribution of the Company shall be equal the amounts set forth on Appendix II which is its share of the fair market value of the properties contributed to the Partnership by Mission West Properties, L.P. I and the initial Capital Contribution of each Limited Partner shall be the amounts set forth on Appendix II which is the Limited Partner’s share of the fair market value of the properties contributed to the Partnership by Mission West Properties, L.P. I as further set forth in Appendix I of the Division Agreement.

1.6“AFFILIATE” means, (a) with respect to any individual Person, any member of the Immediate Family of such Person or a trust established for the benefit of such member, or (b) with respect to any Entity, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, any such Entity.

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1.7“AGREEMENT” means this Amended and Restated Agreement of Limited Partnership, as originally executed and as amended, modified, supplemented or restated from time to time, as the context requires.

1.8“ARTICLES OF INCORPORATION” means the Articles of Incorporation of the Company, as amended and restated from time to time, or the articles of incorporation, certificate of incorporation, operating agreement of other Charter instrument of any corporation or other entity which is a successor to the Company by merger or consolidation.

1.9“ASSIGNEE” means a Person to whom one or more L.P. Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5.

1.10“AVAILABLE CASH” means the Partnership’s share of the Operating Partnership’s Available Cash (as defined in the Acquisition Agreement) with respect to the applicable period of measurement (i.e., any period beginning on the first day of the fiscal year, quarter or other period commencing immediately after the last day of the fiscal year, quarter or other applicable period for purposes of the prior calculation of Available Cash for or with respect to which a distribution has been made, and ending on the last day of the fiscal year, quarter or other applicable period immediately preceding the date of the calculation). Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, nor shall the calculation of Available Cash take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership.

1.11“BERG ACQUISITION” has the meaning set forth in the Acquisition Agreement.

1.12“BERG GROUP” means Carl E. Berg, Clyde J. Berg, the members of their respective Immediate Families, and any Entity which is an Affiliate of either Carl E. Berg or Clyde J. Berg, excluding the Partnership and the Company.

1.13“BERG LAND HOLDINGS” means certain land held by members of the Berg Group which the Operating Partnership may acquire under certain circumstances pursuant to the terms of the Acquisition Agreement and the related Berg Land Holdings Option Agreement to be entered into by the parties thereto upon approval of certain transactions by the Company’s shareholders.

1.14“CAPITAL ACCOUNT” means with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions:

(a)to each Partner’s Capital Account there shall be credited (i) such Partner’s Initial Capital Contribution as of the effective date of this Agreement (ii) such Partner’s Capital Contributions subsequent to the Effective Date of this Agreement, (iii) such Partner’s distributive share of Net Income and any items in the nature of income or gain which are specially allocated to such Partner pursuant to Sections 1 and 2 of Appendix III and (iv) the amount of any Partnership liabilities assumed by such Partner or which are secured by any asset distributed to such Partner;

(b)to each Partner’s Capital Account there shall be debited (i) the amount of cash and the Gross Asset Value of any Property distributed to such Partner pursuant to any provision of this Agreement, (ii) such Partner’s distributive share of Net Losses and any

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    items in the nature of expenses or losses which are specially allocated to such Partner pursuant to Sections 1 and 2 of Appendix II, and (iii) the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any asset contributed by such Partner to the Partnership to the extent not assumed by the Partner; and

(c)in the event all or a portion of a Partnership Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall reasonably determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed assets or which are assumed by the Partnership, the General Partner or any Limited Partner) are computed in order to comply with such Regulations, the General Partner may make such modification; provided that it does not have an adverse effect on the amounts distributable to any Partner pursuant to Article 13 hereof upon the dissolution of the Partnership.

1.15“CAPITAL CONTRIBUTION” means, with respect to any Partner, any cash, cash equivalents or the Gross Asset Value of property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Article 4 hereof.

1.16“CAPITAL EVENT” means any Partnership transaction not in the ordinary course of its business, including, without limitation, distribution to the Partners in excess of distributive shares of income, principal payments, prepayments, prepayment penalties, sales, exchanges, foreclosures or other dispositions of Property owned by the Partnership, recoveries of damage awards and insurance proceeds not used to rebuild (other than the receipt of contributions to the capital of the Partnership and business or rental interruption insurance proceeds not used to rebuild).

1.17“CERTIFICATE” means the Certificate of Limited Partnership relating to the Partnership to be filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act.

1.18“CHANGE OF CONTROL TRANSACTION” shall mean (A) any transaction or series of transactions occurring after the Effective Date, in which all Limited Partners in the Operating Partnership are legally entitled to participate and pursuant to which L.P. Units representing more than 50% of the total outstanding L.P. Units of the Operating Partnership are purchased by a Person not controlled by, in control of or under common control with the Company, any Affiliate of the Company or any Affiliate of a Limited Partner, (B) the merger or consolidation of the Partnership with another entity (other than a merger or consolidation in which the holders of L.P. Units of the Partnership immediately before the merger or consolidation own immediately after the merger or consolidation, Voting Securities of the surviving or acquiring Entity or a parent party of such surviving or acquiring Entity, possessing more than 50% of the voting power of the surviving or acquiring Entity or parent party) resulting in the exchange of the outstanding L.P. Units of the Partnership for cash, securities or other property, or (C) any merger, sale, lease, license, exchange or other disposition (whether in one transaction or a series of related transactions) of more than 50% of the assets of the Partnership.

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1.19“CHARTER” has the meaning set forth in Rule 405 of Regulation C promulgated by the SEC under the Securities Act (“Rule 405”).

1.20“CODE” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

1.21“COMMON STOCK” means a share of Common Stock of the Company or any shares of Voting Securities into which the Common Stock may be reclassified or converted or for which shares of Common Stock may be exchanged in any transaction made applicable or available to all holders of Common Stock as a class.

1.22“COMMON STOCK PRICE” means with respect to a particular valuation event identified under this Agreement, the last reported sales price regular way on such date or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way on such date, in either case on the Nasdaq Stock Market, the New York Stock Exchange, or if the Common Stock is not then listed or admitted to trading on any such exchange, any comparable system on which the Common Stock is then listed or admitted to trading or, if not then listed or admitted to trading on any national securities exchange, any comparable system for the 10-trading day period ending with the last day preceding the date of the valuation event.

1.23“COMPANY” means Mission West Properties, a California corporation, and any successor to such corporation.

1.24“CONSENT” means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof.

1.25“DEPRECIATION” means, with respect to any asset of the Partnership for any fiscal year or other period, the depreciation, depletion, amortization or other cost recovery deduction, as the case may be, allowed or allowable for federal income tax purposes in respect of such asset for such fiscal year or other period; provided, however, that except as otherwise provided in Section 1.704-2 of the Regulations, if there is a difference between the Gross Asset Value (including the Gross Asset Value, as increased pursuant to paragraph (d) of the definition of Gross Asset Value) and the adjusted tax basis of such asset at the beginning of such fiscal year or other period, Depreciation for such asset shall be an amount that bears the same ratio to the beginning Gross Asset Value of such asset as the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such fiscal year or other period bears to the beginning adjusted tax basis of such asset; provided, further, that if the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such asset for such fiscal year or other period is zero, Depreciation of such asset shall be determined with reference to the beginning Gross Asset Value of such asset using any reasonable method selected by the General Partner.

1.26“DIVIDEND REINVESTMENT PLAN” has the meaning set forth in Rule 405.

1.27“EFFECTIVE DATE” means the date of closing of the Berg Acquisition.

1.28“EMPLOYEE BENEFIT PLAN” has the meaning set forth in Rule 405.

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1.29“ENTITY” means any general partnership, limited partnership, corporation, joint venture, trust, business trust, real estate investment trust, limited liability company, cooperative or association.

1.30“EQUITY SECURITY” has the meaning set forth in Rule 405.

1.31“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time (or any corresponding provisions of succeeding laws).

1.32“EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

1.33“EXCHANGE FACTOR” has the meaning set forth in the Exchange Rights Agreement, and is equal to the number of L.P. Units exchangeable for one share of Common Stock, from time to time, under the Exchange Rights Agreement.

1.34“EXCHANGE RIGHT” has the meaning set forth in the Exchange Rights Agreement.

1.35“EXCHANGE RIGHTS AGREEMENT” means Exchange Rights Agreement among the Company, and each of the limited partners of the partnerships comprising the Operating Partnership.

1.36“GAAP” means United States generally accepted accounting principles, as in effect from time to time.

1.37“GENERAL PARTNER” means the general partner of the Partnership, if there is more than one general partner, all such general partners.

1.38“GENERAL PARTNER INTEREST” means a Partnership Interest held by the General Partner, in its capacity as general partner. A General Partner Interest may be expressed as a number of Units, each of which shall represent the same Percentage Interest in the Partnership as one L.P. Unit.

1.39“GROSS ASSET VALUE” means, with respect to any asset of the Partnership, such asset’s adjusted basis for federal income tax purposes, except as follows:

(a)the initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, without reduction for liabilities, as determined by the contributing Partner and the Partnership on the date of contribution thereof;

(b)if the General Partner reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Partners, the Gross Asset Values of all Partnership assets shall be adjusted in accordance with Sections 1.704-1(b)(2)(iv)(f) and (g) of the Regulations to equal their respective gross fair market values, without reduction for liabilities, as reasonably determined by the General Partner, as of the following times:

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(1)a Capital Contribution (other than a de minimis Capital Contribution) to the Partnership by a new or existing Partner as consideration for a Partnership Interest; or

(2)the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership assets as consideration for the repurchase of a Partnership Interest; or

(3)the liquidation of the Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations;

(c)the Gross Asset Values of Partnership assets distributed to any Partner shall be the gross fair market values of such assets (taking Section 7701(g) of the Code into account) without reduction for liabilities, as reasonably determined by the General Partner as of the date of distribution; and

(d)the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations (as set forth in Appendix III); provided, however, that Gross Asset Values shall not be adjusted pursuant to this paragraph (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d).

At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Partnership’s assets for purposes of computing Net Income and Net Loss.

1.40“IMMEDIATE FAMILY” means, with respect to any Person, such Person’s spouse, parents, parents-in-law, children, nephews, nieces, brothers, sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law and daughters-in-law or any trust solely for the benefit of any of the foregoing family members whose sole beneficiaries include the foregoing family members.

1.41“INCAPACITY” OR “INCAPACITATED” means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause

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(b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof; (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within 90 days after the expiration of any such stay.

1.42“INDEMNITEE” means (i) any Person made a party to a proceeding by reason of (A) such Person’s status as (1) the General Partner, (2) a director, trustee or officer of the Partnership or the General Partner, or (3) a director, trustee or officer of any other Entity, each Person serving in such capacity at the request of the Partnership or the General Partner, or (B) his or its liabilities, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to); and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion.

1.43[Reserved]

1.44“LIEN” means, with respect to any asset of the Partnership, (i) any mortgage, deed of trust, lien, pledge, encumbrance, charge, restriction or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

1.45“LIMITED PARTNER” means any Person named as a Limited Partner in Appendix II, as such Appendix may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a Limited Partner of the Partnership.

1.46“LIMITED PARTNER INTEREST” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of L.P. Units.

1.47“LIQUIDATING EVENT” has the meaning set forth in Section 13.1 hereof.

1.48“LIQUIDATOR” has the meaning set forth in Section 13.2 hereof.

1.49“L.P. UNIT” means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1, 4.2 and 4.3. The number of L.P. Units outstanding and the Percentage Interests in the Partnership represented by such L.P. Units are set forth in Appendix II, as such Appendix may be amended from time to time. The ownership of L.P. Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the L.P. Units shall be uncertificated securities.

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1.50“L.P. UNIT MAJORITY” means the Limited Partners holding the right to vote, in the aggregate, a majority of the total number of L.P. Units outstanding in the Operating Partnership.

1.51“NET INCOME” OR “NET LOSS” means, for each fiscal year or other applicable period, an amount equal to the Partnership’s taxable income or loss for such year or period as determined for federal income tax purposes by the General Partner, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), adjusted as follows: (a) by including as an item of gross income any tax-exempt income received by the Partnership and not otherwise taken into account in computing Net Income or Net Loss; (b) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code (or which is treated as a Section 705(a)(2)(B) expenditure pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations) and not otherwise taken into account in computing Net Income or Net Loss, including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership and by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property disallowed pursuant to Section 267(a)(1) or 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code; (c) by taking into account Depreciation in lieu of depreciation, depletion, amortization and other cost recovery deductions taken into account in computing taxable income or loss; (d) by computing gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (e) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (g) of the Regulations, by taking into account the amount of such adjustment as if such adjustment represented additional Net Income or Net Loss pursuant to Appendix III; and (f) by not taking into account in computing Net Income or Net Loss items separately allocated to the Partners pursuant to Sections 1 and 2 of Appendix III.

1.52“NEW EQUITY FINANCING RIGHT” has the meaning set forth in Section 8.8.

1.53“NONRECOURSE DEDUCTIONS” has the meaning set forth in Regulations Sections 1.704-2(b)(1) and 1.704-2(c).

1.54“NONRECOURSE LIABILITIES” has the meaning set forth in Regulations Section 1.704-2(b)(3).

1.55“OPERATING PARTNERSHIP” means, collectively, Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III, Mission West Properties, L.P. IV and Mission West Properties, L.P. V.

1.56“PARTNER” means the General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners collectively.

1.57“PARTNER MINIMUM GAIN” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

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1.58“PARTNER NONRECOURSE DEBT” has the meaning set forth in Regulations Section 1.704-2(b)(4).

1.59“PARTNER NONRECOURSE DEDUCTIONS” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

1.60“PARTNERSHIP” means the limited partnership governed by this Agreement, and any successor thereto.

1.61“PARTNERSHIP INTEREST” means an ownership interest in the Partnership representing an Adjusted Contribution by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of L.P. Units.

1.62“PARTNERSHIP MINIMUM GAIN” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

1.63“PARTNERSHIP RECORD DATE” means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1, which shall be the same as the record date established by the Company for a distribution to its shareholders of some or all of its portion of such distribution.

1.64“PARTNERSHIP YEAR” means the fiscal year of the Partnership, which is the calendar year, as set forth in Section 9.2.

1.65“PENDING DEVELOPMENT PROJECTS” means three Berg Group-owned R&D Property development projects which the Operating Partnership has agreed to acquire upon their completion pursuant to the terms of the Acquisition Agreement and the related Pending Projects Option Agreement to be entered into by the parties thereto upon the approval of certain transactions by the Company’s shareholders.

1.66“PARTNERSHIP INTEREST” means, as to a Partner, the fractional part of the Partnership Interests owned by such Partner and expressed as a percentage as specified in Appendix II, as such Appendix may be amended from time to time.

1.67“PERMITTED PARTNERS” has the meaning set forth in Section 1(b) of Appendix III.

1.68“PERMITTED TRANSFEREE” means any person to whom L.P. Units are Transferred in accordance with Section 11.3 of this Agreement.

1.69“PERSON” means an individual or Entity.

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1.70“PRECONTRIBUTION GAIN” has the meaning set forth in Section 3(c) of Appendix III.

1.71“PUT RIGHTS” shall have the meaning provided in Section 8.7.

1.72“PROTECTIVE PROVISIONS EXPIRATION DATE” means the date on which the members of the Berg Group own less than 15% of the Common Stock, treating all Equity Securities of the Company and all L.P. Units owned by such members as Common Stock outstanding for this purpose.

1.73[Reserved]

1.74“QUARTER” means each of the three month periods ending on March 31, June 30, September 30 and December 31.

1.75“REGULATIONS” means the final, temporary or proposed Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

1.76“REIT” means a real estate investment trust as defined in Section 856 of the Code.

1.77“REIT REQUIREMENTS” means all of the requirements imposed under the Code on any entity seeking to qualify and remain qualified as a REIT.

1.78“RESTRICTED PARTNER” has the meaning set forth in Section 1(b) of Appendix III.

1.79“SEC” means the U.S. Securities and Exchange Commission.

1.80“SECURITIES ACT” means the Securities Act of 1933, as amended.

1.81“STOCK OPTION PLAN” means the Company’s 1997 Stock Option Plan and any other plan adopted from time to time by the Company pursuant to which shares of Common Stock are issued, or options to acquire shares of Common Stock are granted, to consultant, employees or directors of the Company, the Operating Partnership or their respective Affiliates in consideration for services or future services.

1.82“SUBSIDIARY” means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the Voting Securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person.

1.83“SUBSTITUTED LIMITED PARTNER” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4 hereof.

1.84“TAX ITEMS” has the meaning set forth in Appendix III.

1.85“TERMINATING CAPITAL TRANSACTION” means any Change of Control Transaction.

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1.86“TOTAL MARKET CAPITALIZATION” means the market value of the outstanding Common Stock determined as if all L.P. Units in the Operating Partnership had been converted into Common Stock at the Exchange Factor plus the total debt of the Company and the Operating Partnership.

1.87“TRANSFER” as a noun, means any sale, assignment, conveyance, pledge, hypothecation, gift, encumbrance or other transfer, and as a verb, means to sell, assign, convey, pledge, hypothecate, give, encumber or otherwise transfer.

1.88“UNIT” means an equal undivided interest in all of the outstanding Partnership Interests.

1.89“UNITED STATES PERSON” means a holder of L.P. Units who is an individual who is a citizen or resident of the United States; a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any State; an estate the income of which from sources without the United States is includable in gross income for United States federal income tax purposes; a trust the primary supervision of which is exercisable by a court within the United States and having one or more United States fiduciaries with authority to control all substantial decisions of such trust; and any Person whose income or gain in respect of the L.P. Units is effectively connected with the conduct of a United States trade or business.

1.90“VOTING SECURITIES” means any Equity Security which entitles the holder thereof to vote on all matters submitted for a vote of equity holders by the issuer of such Equity Security, including the right to vote for directors in the case of a corporation.

Certain additional terms and phrases have the meanings set forth in Appendix III.

ARTICLE 2.ORGANIZATIONAL MATTERS.

2.1CONTINUATION.  The Partners hereby agree to continue the Partnership under and pursuant to the Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.

2.2NAME.  The name of the Partnership shall be Mission West Properties, L.P. IV. The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership,” “L.P.,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary to comply with the laws of any jurisdiction. The General Partner in its sole and absolute discretion may, upon 5 days’ prior written notice to the Limited Partners, change the name of the Partnership.

2.3REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE.  The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, 1029 Orange Street, Wilmington, Delaware 19801. The principal office of the Partnership shall be 10050 Bandley Drive, Cupertino, California 95014, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership

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may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable.

2.4POWER OF ATTORNEY.

A.Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to:

(1)execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property, including, without limitation, any documents necessary or advisable to convey any Contributed Property to the Partnership; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13, or the Capital Contribution of any Partner; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interest; and

(2)execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement.

Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14, or as may be otherwise expressly provided for in this Agreement.

B.The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the Transfer of all or any portion of such Limited Partner’s or Assignee’s L.P. Units and shall extend to such Limited Partner’s

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or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner’s or Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.

2.5TERM.  The term of the Partnership shall commence on the date hereof and shall continue until December 31, 2048, unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law.

ARTICLE 3.PURPOSE.

3.1PURPOSE AND BUSINESS.  The purpose and nature of the business to be conducted by the Partnership is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act including, without limitation, to engage in the following activities: to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with  real property and personal property of all kinds; to undertake such other activities as may be necessary, advisable, desirable or convenient to the business of the Partnership; and to engage in such other ancillary activities as shall be necessary or desirable to effectuate the foregoing purposes.

3.2POWERS.  The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business for which it has been formed and for the protection and benefit of the Partnership; provided, that the Partnership shall not take, and shall refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Company to continue to qualify as a REIT; (ii) could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Company or its securities, unless such action (or inaction) shall have been specifically consented to by the Company, if not the General Partner, and the L.P. Unit Majority.

ARTICLE 4.CAPITAL CONTRIBUTIONS.

4.1CAPITAL CONTRIBUTIONS OF THE PARTNERS.

A.At the time of the execution of this Agreement, the Partners have been credited with the Adjusted Contributions, contemplated by the Division Agreement, as set forth in Appendix II to this Agreement. Each Limited Partner shall own L.P. Units in the amount set forth for such Partner in Appendix II and shall have a Percentage Interest in the Partnership as set forth in Appendix II, which shall be adjusted in Appendix II from time to time by the General Partner to the extent necessary to reflect accurately exchanges, additional Capital Contributions, the issuance of additional Partnership Interests, the exercise of Put Rights with respect to L.P. Units or similar events having an effect on any Partner’s Percentage Interest.

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B.The number of Units held by the General Partner, in its capacity as general partner, shall be deemed to be the General Partner Interest. Except as provided in Sections 4.2, 10.5 and 13.3, the Partners shall have no obligation to make any additional Capital Contributions.

4.2ADDITIONAL FUNDS; RESTRICTIONS ON COMPANY.

A.The sums of money required to finance the business and affairs of the Partnership shall be derived from the initial Capital Contributions made to the Partnership by the Company as set forth in the Acquisition Agreement and from funds generated from the operation and business of the Partnership including, without limitation, distributions directly or indirectly received by the Partnership from Available Cash provided by the Operating Partnership. In the event additional financing is needed from sources other than as set forth in the preceding sentence for any reason, subject to the provisions of Sections 8.8 and 8.9, the General Partner may, in its discretion, in such amounts and at such times as it solely shall determine to be necessary or appropriate, obtain additional funds for the Operating Partnership which shall be allocated to each of the partnerships included therein, including the Partnership, pro rata in proportion to the ratio of the number of Units then outstanding in each such Partnership to the total number of L.P. Units then outstanding in the Operating Partnership taken as a whole (“Pro Rata Share”). Accordingly, to the extent of such Pro Rata Share of the Partnership and subject to Section 8.9 and any other limitations contained in this Agreement or the Acquisition Agreement, the General Partner may, (i) cause the Partnership to issue additional Partnership Interests and admit additional Limited Partners to the Partnership in accordance with Section 4.3; (ii) make additional Capital Contributions to the Partnership (subject to the provisions of Section 4.2B.); (iii) cause the Partnership to borrow money, enter into loan arrangements, issue debt securities, obtain letters of credit or otherwise borrow money on a secured or unsecured basis; or (iv) make loans to the Partnership (subject to Section 4.2B.). In no event shall the Limited Partners be required to make any additional Capital Contributions or any loan to, or otherwise provide any financial accommodation for the benefit of, the Partnership pursuant to any such permitted action by the General Partner, except insofar as a Limited Partner has exercised its New Equity Financing Right pursuant to Section 8.8.

B.Except as agreed otherwise at the time by vote or written consent of the L.P. Unit Majority: (i) the Company shall lend to the Partnership its Pro Rata Share of the proceeds of or consideration received by the Company from all loans and advances to the Company pursuant to any financial borrowing arrangement on the same financial terms and conditions, including interest rate and repayment schedule, as shall be applicable with respect to or incurred in connection with the issuance of such loans and advances to the Company (which the Partnership may, in turn, lend to any other partnership constituting part of the Operating Partnership); (ii) in the case of Equity Securities senior or junior to the Common Stock as to dividends and distributions on liquidation, which are not convertible into Common Stock as of the issuance date, the Company shall contribute to the Partnership the proceeds of or consideration (including any property or other non-cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and shall receive from the Partnership, new Partnership Interests in the Partnership in consideration therefor with the same financial terms and conditions, including dividend, dividend priority, liquidation preference, conversion and redemption rights, as are applicable to such Equity Securities; (iii) in the case of Common Stock, or other Equity Securities convertible into Common Stock as of the issuance date, including, without limitation, shares of Common Stock or other Equity Securities issued upon exercise of options issued under the Stock Option Plan or any other Employee Benefit Plan of the Company, the Company shall contribute to the Partnership the proceeds of or consideration (including any property or other non-

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cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and shall receive from the Partnership a number of additional Units of General Partner Interest in consideration therefor equal to the product of (x) the number of shares of Common Stock or other Equity Securities issued by the Company, multiplied by (y) the Exchange Factor in effect on the date of such contribution; and (iv) in the case of Common Stock or other Equity Securities issued upon the exercise or surrender of rights under a stock option, warrant, or any other right for which the Company does not receive proceeds, and issues less than the number of shares of Common Stock or other Equity Securities subject to such option, warrant or other right to the holder thereof retaining the excess of such shares as payment of the purchase price (a “net exercise”), or where the Company uses the proceeds received pursuant to a Dividend Reinvestment Plan to acquire shares of Common Stock or other Equity Securities to be issued to the shareholder exercising such right, the Company shall receive from the Partnership a number of additional Units of General Partner Interest equal to the actual number of shares of Common Stock or other Equity Securities so issued to the shareholder multiplied by the Exchange Factor.

4.3ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS; ADMISSION OF ADDITIONAL LIMITED PARTNERS.  In addition to any Partnership Interests issuable by the Partnership pursuant to Section 4.2, and subject to the provisions of Sections 8.8 and 8.9, the General Partner is authorized to cause the Partnership to issue additional Partnership Interests (or options therefor) in the form of L.P. Units or other Partnership Interests senior or junior to the L.P. Units to any Persons at any time or from time to time, for consideration per Unit of Partnership Interest not less than the Common Stock Price determined at the initial issuance date divided by the Exchange Factor, and on such other terms and conditions, as the General Partner shall establish provided, however, that (i) each partnership included in the Operating Partnership shall effect its Pro Rata Share of such issuance, (ii) such issuance does not cause the Partnership to become, with respect to any Employee Benefit Plan subject to Title I of ERISA or Section 4975 of the Code, a “party in interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(e) of the Code); and (iii) such issuance does not cause any portion of the assets of the Partnership to constitute assets of any Employee Benefit Plan subject to Section 2510.3-101 of the regulations of the United States Department of Labor. Subject to the limitations set forth in the preceding sentence, the General Partner may take such steps as it, in its reasonable discretion, deems necessary or appropriate to admit any Person as a Limited Partner of the Partnership, including, without limitation, amending the Certificate, Appendix II or any other provision of this Agreement.

4.4REPURCHASE OF COMPANY EQUITY SECURITIES.  In the event the Company shall elect to purchase from its shareholders shares of Common Stock for the purpose of delivering such shares to satisfy an obligation under any Dividend Reinvestment Plan or Employee Benefit Plan adopted by the Company, or shall repurchase any other Equity Securities of the Company pursuant to any other share repurchase obligation or arrangement undertaken by the Company with any Company shareholder, including preferred stock redemptions, the purchase price paid by the Company for such shares and any other expenses incurred by the Company in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the Company, subject to the condition that: (i) if such shares subsequently are to be sold by the Company, the Company shall pay to the Partnership any proceeds received by the Company for such shares of Common Stock or other Equity Securities (provided that an exchange of shares of Common Stock for L.P. Units pursuant to the Exchange Rights Agreement would not be considered a sale for such purposes); and (ii) if such shares are not re-transferred by the Company within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel the number of Units of

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General Partner Interest held by the Company determined by multiplying (x) the quotient obtained by dividing the total amount deemed paid by the Partnership by the Common Stock Price determined as of the repurchase date, by (y) the Exchange Factor in effect on the date of such repurchase.

4.5NO THIRD PARTY BENEFICIARY.  No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns.

4.6NO INTEREST; NO RETURN.  No Partner shall be entitled to interest on its Capital Contribution or on such Partner’s Capital Account. Except as provided in Section 8.7 or Article 13 of this Agreement, or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution from the Partnership.

ARTICLE 5.DISTRIBUTIONS.

5.1REGULAR DISTRIBUTIONS.  Except for distributions pursuant to Section 13.2 in connection with the dissolution and liquidation of the Partnership, and subject to the provisions of Sections 5.3, 5.4 and 5.5, the General Partner shall cause the Partnership to distribute, from time to time as determined by the General Partner, but in any event not less frequently than once each Quarter, the Partnership’s Pro Rata Share of all Available Cash, to the Partners, in accordance with each Partner’s respective Percentage Interest; provided, however, that in no event may a Limited Partner receive a distribution of Available Cash with respect to a L.P. Unit, if such Limited Partner is entitled to receive a distribution out of such Available Cash with respect to a share of Common Stock for which such L.P. Unit has been exchanged.

5.2QUALIFICATION AS A REIT.  The General Partner shall be entitled to cause the Partnership to distribute to the General Partner the Partnership’s Pro Rata Share of Available Cash distributed by the Operating Partnership to enable the General Partner to pay shareholder dividends that will (i) satisfy the REIT Requirements for distributions to shareholders, and (ii) avoid any federal income or excise tax liability of the General Partner; provided, however, the General Partner is not bound to comply with this covenant to the extent such distributions would violate applicable Delaware law.

5.3WITHHOLDING.  With respect to any withholding tax or other similar tax liability or obligation to which the Partnership may be subject as a result of any act or status of any Partner or to which the Partnership becomes subject with respect to any Unit, the Partnership shall have the right to withhold amounts of Available Cash distributable to such Partner or with respect to such Units, to the extent of the amount of such withholding tax or other similar tax liability or obligation pursuant to the provisions contained in Section 10.5.

5.4ADDITIONAL PARTNERSHIP INTERESTS.  If the Partnership issues Partnership Interests in accordance with Section 4.2 or 4.3 which are entitled to certain distribution priorities, Section 5.1 shall be amended, as necessary, to reflect the distribution priority of such Partnership Interests and corresponding amendments shall be made to the provisions of Appendix III.

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5.5DISTRIBUTIONS UPON LIQUIDATION.  Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2.

ARTICLE 6.ALLOCATIONS.

The Net Income, Net Loss, and other Partnership items of income, gain, loss, deduction or credit as provided under the Code, shall be allocated pursuant to the provisions of Appendix III, as amended from time to time.

ARTICLE 7.MANAGEMENT AND OPERATION OF BUSINESS.

7.1MANAGEMENT.

A.Except as otherwise expressly provided in this Agreement, and subject to the provisions of Section 8.9, all management powers over the business and affairs the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners, with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under the Act or which are granted to the General Partner under any other provision of this Agreement, the General Partner shall have full power and authority to make contracts, sign documents, conduct litigation, acquire and convey property, hire employees, consultants and professionals, raise capital, borrow funds, incur liabilities, invest funds, comply with all applicable laws, and do all other things deemed necessary or desirable by the General Partner to conduct the business of the Partnership on behalf of the Partnership; to exercise all powers set forth in Section 3.2, and to effectuate the purposes set forth in Section 3.1, provided that any exercise of the foregoing rights and powers must be consistent with the REIT Requirements.

B.Except as provided in Section 8.9, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.

C.At all times from and after the date hereof, in accordance with the provisions of the Acquisition Agreement, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amount as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. Such accounts may include funds of the General Partner and the other partnerships in the Operating Partnership, which the General Partner shall be free to commingle.

D.In exercising its authority under this Agreement, the General Partner shall take into account the tax consequences to any Partner of any action taken by it and shall select the alternative which appears at the time to present the least adverse tax consequences to the Limited

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 Partners. By way of example, but not of limitation: If the General Partner decides to refinance (directly or indirectly) any outstanding indebtedness of the Partnership, the General Partner shall use reasonable efforts to structure such refinancing in a manner that minimizes any adverse tax consequences resulting therefrom to the Limited Partners. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of a necessary action (or inaction) by the General Partner taken pursuant to its authority under and in accordance with this Agreement where avoiding the resulting adverse tax consequences to a Limited Partner was not reasonably practicable under the circumstances.

7.2CERTIFICATE OF LIMITED PARTNERSHIP.  The General Partner shall file the amended Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5A(iv) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner.

7.3REIMBURSEMENT OF THE GENERAL PARTNER AND THE COMPANY.

A.Except as provided in this Section 7.3 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.

B.The General Partner, shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all expenses that it incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided, that the amount of any such reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it in its name. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.6.

7.4OUTSIDE ACTIVITIES OF THE GENERAL PARTNER.  The General Partner shall not directly or indirectly enter into or conduct any business other than in connection with the ownership, acquisition, development and disposition of Partnership Interests and the management of the business of the Partnership, and such activities as are incidental thereto. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests.

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7.5CONTRACTS WITH AFFILIATES.

A.The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.

B.Except as provided in Section 7.4, the Partnership may Transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable.

C.Except as expressly permitted by this Agreement or otherwise contemplated by the Acquisition Agreement, neither the General Partner nor any of its Affiliates shall sell, Transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable.

D.Except as provided otherwise in Section 8.9, the General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, Employee Benefit Plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any Subsidiaries of the Partnership.

E.The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a “right of first opportunity” or “right of first offer” arrangement, non-competition agreements and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable.

7.6INDEMNIFICATION.

A.To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, reasonable attorneys’ fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the Company as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, except to the extent it is finally determined by a court of competent jurisdiction, from which no further appeal may be taken, that such Indemnitee’s action constituted intentional acts or omissions constituting willful misconduct or fraud. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), except with respect to Partnership debt that has been assumed or guaranteed by an Indemnitee in its capacity as a Limited Partner. The General Partner is hereby authorized and empowered, on behalf of the Partnership, to

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enter into one or more indemnity agreements consistent with the provisions of this Section 7.6 in favor of any Indemnitee having or potentially having liability for any such indebtedness. Any indemnification pursuant to this Section 7.6 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.6.

B.Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding.

C.The indemnification provided by this Section 7.6 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, under the Company’s Articles of Incorporation, as a matter of law, or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnities are indemnified.

D.The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnities and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

E.For purposes of this Section 7.6, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an Employee Benefit Plan whenever the performance by such Indemnitee of its duties to the Partnership also imposes duties on, or otherwise involves services by, such Indemnitee to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an Employee Benefit Pan pursuant to applicable law shall constitute fines within the meaning of this Section 7.6; and actions taken or omitted by the Indemnitee with respect to an Employee Benefit Plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participant and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.

F.In no event may an Indemnitee subject any of the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

G.An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

H.The provisions of this Section 7.6 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.6 or any provision hereof shall be prospective only and shall not in any way affect the Partnership’s liability to any Indemnitee under this Section 7.6, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole

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or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

I.The provisions of this Section 7.6 shall be inapplicable to any investigation, claim, suit, or proceeding, or the portion thereof, which concerns claims for breach of contract between the Partnership and a Person contracting other than in such Person’s capacity as a Partner, or as an officer or director of the General Partner.

J.No provision of this Section 7.6 shall be construed as permitting any contract or transaction which is prohibited by the provisions of Section 9.2(b) of the Acquisition Agreement.

7.7LIABILITY OF THE GENERAL PARTNER.

A.Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission, if the General Partner acted in good faith; provided, however, the foregoing shall not be deemed to exculpate the Company from any liability the Company may have under the Acquisition Agreement.

B.Subject to its obligations and duties as General Partner set forth in Section 7.1A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agent. The General Partner shall not be liable for any acts or omissions on the part of any such agent, except in circumstances for which the General Partner may be liable under Section 7.7A or would not be subject to indemnification under Section 7.6.

C.Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner’s and its officers’ and directors’ liability to the Partnership and the Limited Partners under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

7.8LIMITED PARTNERS’ RIGHT TO BRING DERIVATIVE LAWSUITS.  Any Limited Partner may bring an action on behalf of the Partnership, as permitted under the Act and the laws of the State of Delaware, to recover a judgment in favor of the Partnership if the General Partner has refused to bring the action or if an effort to cause the General Partner to bring the action is not likely to succeed.

7.9OTHER MATTERS CONCERNING THE GENERAL PARTNER.

A.The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.

B.The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and

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other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

C.The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder.

D.Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT; or (ii) to avoid the Company incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

7.10TITLE TO PARTNERSHIP ASSETS.  Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership asset for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held.

7.11RELIANCE BY THIRD PARTIES.  Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that: (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate,

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document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

ARTICLE 8.RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.

8.1LIMITATION OF LIABILITY.  The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Sections 10.5 and 13.3 hereof, or under the Act. Notwithstanding the preceding sentence, each Limited Partner shall have the right, but not the obligation, to guarantee a portion of the indebtedness of the Partnership in accordance with the terms of the Acquisition Agreement.

8.2MANAGEMENT OF BUSINESS.  No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

8.3OUTSIDE ACTIVITIES OF LIMITED PARTNERS.  Subject to any agreements entered into pursuant to Section 7.5 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its Subsidiaries including the Acquisition Agreement, any Limited Partner (other than the Company) and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner (other than the Company) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee which are permitted within the scope of this Section 8.3. None of the Limited Partners (other than the Company) nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person.

8.4RETURN OF CAPITAL.  Except in connection with the exercise of Exchange Rights or Put Rights, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Appendix III, or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions.

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8.5RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP.

A.In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner’ s own expense (including such reasonable copying and administrative charges as the General Partner may establish from time to time): (i) to obtain a copy of the most recent annual and quarterly reports filed by the Company with the SEC pursuant to the Exchange Act; (ii) to obtain a copy of the Partnership’s federal, state and local income tax returns for each Partnership Year; (iii) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (iv) to obtain a copy of this Agreement and the Certificate and all amendments and/or restatements thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments and/or restatements thereto have been executed; and (v) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner.

B.Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other confidential information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or the Company or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential.

8.6EXCHANGE RIGHTS.  The Limited Partners may exchange all or a portion of their L.P. Units for shares of Common Stock on the terms and subject to the conditions and restrictions contained in the Exchange Rights Agreement.

8.7PUT RIGHTS.

A.Upon the terms and subject to the conditions of this Agreement, each Limited Partner (other than Carl E. Berg and Clyde J. Berg with respect to all L.P. Units owned by them beneficially as of the Effective Date) shall have the right to tender to the Partnership outstanding L.P. Units no more than once during any 12-month period commencing after December 29, 1999. The Partnership shall purchase properly tendered L.P. Units for cash at a price (the “Tender Price”) equal to the average market value of the Common Stock price as of the date the Limited Partner delivers to the General Partner, at the address provided in Appendix II, a completed and duly executed Letter of Transmittal in the form attached as Exhibit A to the Exchange Rights Agreement, and any other documents required by the Letter of Transmittal. Only a tender in this manner will constitute a valid tender of L.P. Units pursuant to this Section 8.7A. The General Partner shall make all determinations as to the validity and form of any tender of L.P. Units in accordance with the provisions of this Agreement, and upon rejection of a tender, shall give the tendering holder written notice of such rejection, which shall include the reasons therefor. Unless otherwise agreed by the General Partner or as provided in Section 8.7C, tenders of L.P. Units pursuant to this Section 8.7A shall be irrevocable and shall not be subject to withdrawal or modification.

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B.Within 15 days after the valid tender of L.P. Units pursuant to Section 8.7A, the Company may make an election to purchase such L.P. Units itself with cash of the Company (the “Cash Election”). If with respect to any tender of L.P. Units pursuant to this Section 8.7, the Company makes the Cash Election, then within 90 days after such tender the Company shall pay to the tendering Limited Partner an aggregate amount of cash equal to the purchase price of the tendered L.P. Units with available cash, borrowed funds or the proceeds of an offering of new shares of Common Stock. Upon acquiring the L.P. Units, the Company may cause the Partnership to retire the L.P. Units and convert them to the same number of Units of General Partner Interest, and the General Partner shall amend Appendix II accordingly.

C.Notwithstanding the foregoing, if the purchase price for the L.P. Units tendered by a Limited Partners in one year exceeds $1,000,000, the Partnership or the Company shall be entitled to reduce proportionally the number of L.P. Units to be acquired from each Tendering Partner so that the total purchase price does not exceed $1,000,000 if the Company so elects. In addition, if the Company does not timely make the Cash Election, the Partnership shall deliver the purchase price for the tendered L.P. Units to the Limited Partner within 45 days after the Letter of Transmittal was delivered to the General Partner. The General Partner may defer payment of the purchase price until such time not to exceed 120 days after the valid tender of L.P. Units pursuant to Section 8.7A as the Partnership has adequate Available Cash after payment of the purchase price, in the reasonable judgment of the General Partner, to fund current distributions necessary for the Company to satisfy the REIT Requirements following the waiver by the Company of its right to make the Cash Election. In such event, the General Partner shall give the tendering Limited Partner written notice of its decision to defer the payment with a calculation supporting the General Partner’s determination within 20 days after the Letter of Transmittal was delivered to the General Partner. Upon receiving such notice, the Limited Partner may withdraw the tender. In addition, the Limited Partner may instead exercise its rights under the Exchange Rights Agreement. If a Limited Partner tenders L.P. Units pursuant to this Section 8.7, the Limited Partner shall pay the amount of any additional documentary, stamp or similar issue or transfer tax which is due, and shall be responsible for all income or other taxes as a result of such exchange.

D.Each tender of L.P. Units shall constitute a representation and warranty by the tendering Limited Partner of each of the representations and warranties set forth in the form of Letter of Transmittal.

E.Until the holder of L.P. Units tendered pursuant to Section 8.7 has received cash in exchange therefor, such Limited Partner shall continue to hold and own such L.P. Units for all purposes of this Agreement.

8.8NEW EQUITY FINANCING RIGHTS.

A.If the General Partner determines that it is in the best interests of the Partnership to obtain additional funds through the issuance of additional Partnership Interests, the General Partner shall first offer to the Limited Partners in each of the partnerships comprising the Operating Partnership, including the Partnership, the right of first refusal to purchase that portion of such additional Partnership Interests which their respective numbers of L.P. Units bear to the total number of outstanding L.P. Units in the Operating Partnership. The General Partner shall make this offer pursuant to a written notice describing the offering price, class or series of Partnership Interest, and all other material terms of the offer. Such notice shall be sent to each Limited Partner at the address reflected in Appendix II, as amended. The Limited Partners shall have 10 days from the date

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of such notice to elect to purchase any such additional Partnership Interests. Such election shall be made pursuant to a written subscription form specifying the number of Units of additional Limited Partnership Interests the Limited Partner intends to acquire and the total purchase price therefor, and shall be signed by the Limited Partner and delivered to the General Partner at the address set forth on Appendix II. After such 10-day period, the General Partner shall be free to offer any additional Limited Partnership Interests on substantially similar terms to non-Partners and Partners alike.

B.The foregoing right of the Limited Partners to acquire additional equity interests offered by the Partnership (“New Equity Financing Right”) shall not apply to any offering (i) which is part of a transaction in which the Limited Partners had the ability to exercise their New Equity Financing Rights under the Acquisition Agreement with respect to an offering of Equity Securities by the Company, (ii) in connection with a merger or other business combination subject to approval by the L.P. Unit Majority pursuant to Section 8.9, (iii) to a Person in connection with the acquisition of property or services by the Partnership from such Person, or (iv) of any Partnership Interest upon conversion of an outstanding Equity Security of the Partnership, any Partnership Subsidiary, or the Company.

8.9MATTERS REQUIRING L.P. UNIT MAJORITY APPROVAL.

The consent of the L.P. Unit Majority will be required with respect to the following actions involving the Partnership: (i) the material amendment, modification or termination of the Agreement; (ii) a general assignment for the benefit of creditors or the appointment of a custodian, receiver or trustee for any of the assets of the Partnership; (iii) the institution of any proceeding for bankruptcy of the Partnership; (iv) the Transfer of any General Partnership Interests, including transfers attendant to any merger, consolidation or liquidation of the Company except as otherwise provided in 11.2 C.; (v) the admission of any additional or substitute General Partner in the Partnership; and (vi) a Change of Control Transaction. In addition, until the Protective Provisions Expiration Date, the consent of the L.P. Unit Majority will also be required with respect to: (i) any Terminating Capital Transaction; (ii) the dissolution and liquidation of the Partnership; and (iii) the Partnership’s issuance of Limited Partner Interests having seniority over the L.P. Units with respect to distributing assets, and voting rights.

8.10[Reserved]

ARTICLE 9.BOOKS, RECORDS, ACCOUNTING AND REPORTS.

9.1RECORDS AND ACCOUNTING.

The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership’s business, including, without limitation, all books and records necessary to comply with applicable REIT Requirements and to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Sections 8.5A. and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax

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reporting purposes, on an accrual basis in accordance with GAAP, or such other basis as the General Partner determines to be necessary or appropriate.

9.2FISCAL YEAR.  The fiscal year of the Partnership shall be the calendar year.

ARTICLE 10.TAX MATTERS.

10.1PREPARATION OF TAX RETURNS.  The General Partner shall arrange for the preparation and timely filing of all Partnership returns for federal and state income tax purposes and shall use all reasonable efforts to furnish, within sixty (60) days of the close of each taxable year, the tax information reasonably required by Limited Partners for their federal and state income tax reporting purposes.

10.2TAX ELECTIONS.  The General Partner shall elect for the Partnership to be considered a limited partnership on all applicable federal and state income tax returns to be filed by the Partnership. Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any other available election pursuant to the Code. Notwithstanding the above, in making any such tax election the General Partner shall take into account the tax consequences to the Limited Partners resulting from any such election. The General Partner shall make such tax elections on behalf of the Partnership as the L.P. Unit Majority request, provided that the General Partner believes that such election is not adverse to the interests of the General Partner, including its interest in preserving its qualification as a REIT under the Code. In addition, the General Partner shall elect the “traditional method” of making Section 704(c) allocations pursuant to Regulations Section 1.704-3 with respect to each Property under the Acquisition Agreement. The General Partner shall have the right to seek to revoke any tax election it makes (other than the election to use the traditional method of making the Section 704(c) allocations described in this Section 10.2), including, without limitation, the election under Section 754 of the Code, upon the General Partner’ s determination, in its sole and absolute discretion, that such revocation is in the best interests of the Limited Partners taken as a whole and with the approval of the L.P. Unit Majority until the Protective Provisions Expiration Date. All such elections and determinations may be made on a Property-by-Property basis, and the General Partner shall be required to analyze the impact of all such elections and determinations on that basis.

10.3TAX MATTERS PARTNER.

A.The General Partner shall be the “tax matters partner” of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the Internal Revenue Service of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the Internal Revenue Service with the name, address, taxpayer identification number, and Percentage Interest of each of the Limited Partners and the Assignees; provided, that such information is provided to the Partnership by the Limited Partners and the Assignees.

B.The tax matters partner is authorized, but not required:

(1)to enter into any settlement with the Internal Revenue Service with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial  proceedings being referred to as “judicial review”), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the Internal Revenue Service providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a “notice partner” (as defined in Section 6231(a)(8) of the Code) or a member of a “notice group” (as defined in Section 6223(b)(2) of the Code);

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(2)in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a “final adjustment”) is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership’s principal place of business is located;

(3)to intervene in any action brought by any other Partner for judicial review of a final adjustment;

(4)to file a request for an administrative adjustment with the Internal Revenue Service and, if any part of such request is not allowed by the Internal Revenue Service, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request;

(5)to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.

The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.6 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such.

C.The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable.

10.4ORGANIZATIONAL EXPENSES.  The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code.

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10.5WITHHOLDING.  Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within 15 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the amount of Available Cash which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner’ s Partnership Interest to secure such Limited Partner’s obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay when due any amounts owed to the Partnership pursuant to this Section 10.5, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event, the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amount payable by a Limited Partner hereunder shall bear interest at the highest base or prime rate of interest published from time to time by any of Wells Fargo Bank, N.A., plus 4 percentage points, but in no event higher than the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder.

ARTICLE 11.TRANSFERS AND WITHDRAWALS.

11.1TRANSFER.

A.The term “Transfer,” when used in this Article 11 with respect to a Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person. The term “Transfer” when used in this Article 11 does not include any exchange of L.P. Units for shares of Common Stock pursuant to the Exchange Rights Agreement.

B.No Partnership Interest shall be Transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any Transfer or purported Transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void.

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11.2TRANSFER OF THE COMPANY’S PARTNERSHIP INTERESTS.

A.The General Partner may not withdraw as General Partner or transfer its General Partner Interest or Limited Partner Interest unless (i) the L.P. Unit Majority (excluding L.P. Units held by the Company) consents to such Transfer or withdrawal, or (ii) such Transfer is to an entity which is wholly-owned by the Company and is a Qualified REIT Subsidiary under Section 856(i) of the Code.

B.In the event the General Partner withdraws as General Partner in accordance with Section 11.2A, the General Partner’s General Partner Interest shall immediately be converted into a Limited Partner Interest.

11.3LIMITED PARTNERS’ RIGHTS TO TRANSFER.

A.Subject to the provisions of this Section 11.3, a Limited Partner (other than the Company) may, without the consent of the General Partner:

(a)if such Limited Partner is a partnership or a limited liability company, Transfer such Limited Partner’s L.P. Units to any partner of such Limited Partner or any member of such limited liability company;

(b)Transfer such Limited Partner’s L.P. Units to any other Limited Partner; and

(c)pledge such Limited Partner’s L.P. Units to any financial institution as collateral for any loan with respect to which such Limited Partner is personally liable.

B.Subject to the provisions of this Section 11.3, a Limited Partner may Transfer any of such Limited Partner’s L.P. Units, other than in accordance with Section 11.3A, only with the prior written consent of the General Partner which may be withheld in its sole discretion.

C.If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner’s estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to Transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.

D.No Transfer by a Limited Partner of its L.P. Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation; (ii) such Transfer would cause the Partnership to become, with respect to any Employee Benefit Plan subject to Title I of ERISA, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(c) of the Code); (iii) such Transfer would, in the opinion of legal counsel for the Partnership, cause any portion of the assets of the Partnership to constitute assets of any Employee Benefit Plan pursuant to Department of Labor Regulations Section 2510.2-101; (iv) such Transfer would subject the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or ERISA; or (v) such Transfer is a sale or exchange, and such sale or exchange would, when aggregated with all other sales and exchanges during the 12-month period ending on the date of the proposed Transfer, result in a Change of Control Transaction.

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E.Subject to the foregoing provisions of Section 11.3 and the terms of Section 12.2, a Limited Partner may transfer L.P. Units to an Affiliate and have such Affiliate become a Limited Partner.

In addition to the conditions set forth in Sections 11.3D, 11.4, and 12.2 any Transfer pursuant to this Article 11 is subject to the following conditions:

(1)unless such Transfer is being made pursuant to an effective registration statement under the Securities Act, or pursuant to Rule 144 or Rule 144A thereunder, the transferring Limited Partner shall deliver to the Company a notice with respect to the proposed transfer, together with an opinion of counsel in form and substance satisfactory to the General Partner prepared by counsel reasonably satisfactory to the General Partner (which shall include, without limitation, counsel to each of the Limited Partners as of the date hereof), to the effect that an exemption from registration and qualification under such Securities Act is available;

(2)the transferring Limited Partner and its transferee shall each provide a certificate to the General Partner, in form and substance satisfactory to the General Partner, to the effect that (i) the proposed transfer will not be effected on or through (a) a United States national, regional or local securities exchange, (b) a foreign securities exchange or (c) an interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers (including, without limitation, the Nasdaq) by electronic means or otherwise, and (ii) it is not, and the proposed transfer will not be made by, through or on behalf of, (a) a Person who regularly quotes equity interests in the Partnership, such as a broker or dealer making a market in equity interests in the Partnership or (b) a Person who regularly makes available to the public (including customers or subscribers) bid or offer quotes with respect to equity interests in the Partnership and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others; PROVIDED, HOWEVER, that such certificate shall not be required for any transfer in connection with a registered public offering;

(3)the transferee must be a United States Person for federal income tax purposes; and

(4)such transfer must not cause the Partnership to terminate or lose its status as a partnership for tax purposes.

F.If it shall become unlawful for any Limited Partner to continue to hold some or all of the L.P. Units held by such Limited Partner, or by reason of legal or regulatory restrictions the cost to such Limited Partner to continue to hold such L.P. Units (in relation to the value of such L.P. Units to such Limited Partner) has, in the reasonable judgment of such Limited Partner, significantly increased, such Limited Partner may, at any time following the date three business days after the delivery by such Limited Partner to the General Partner a notice of the existence of any such restriction, Transfer all or any portion of the L.P. Units held by such Limited Partner free of any restrictions imposed under this Agreement (other than those restrictions required by federal or state laws, including securities, and tax, laws, and subject to the prospective transferee meeting the requirements of Section 12.2, and provided that the transferee Limited Partner shall hold its L.P. Units subject to all of the terms of this Agreement); but only if such Limited Partner cannot then

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exercise its Exchange Rights or Put Rights for cash, and the Company has notified the Limited Partner that the Company will not register for offer and sale all shares of Common Stock issued upon the exercise of the Exchange Rights within 90 days. In connection therewith, the Company shall assist such Limited Partner in disposing of the L.P. Units held by it in a prompt and orderly manner, and (at the request of such Limited Partner) make available (and authorize such Limited Partner to make available through the Company) financial and other information concerning the Company and its Subsidiaries (including, without limitation, the information described in Rule 144A(d)(4)) to any prospective purchaser of such L.P. Units (it being agreed that such prospective purchaser shall be either an “accredited investor” within the meaning of Rule 501 (a) under the Securities Act or a “qualified institutional buyer” within the meaning of Rule 144A(d)(1) under such Act to the extent that such L.P. Units are “restricted securities” as such term is defined in Rule 144). The Company may require that each such prospective purchaser keep confidential, pursuant to customary confidentiality requirements, any information received by it pursuant to this provision.

11.4SUBSTITUTED LIMITED PARTNERS.  The General Partner shall have the right to consent to the admission of a transferee who receives L.P. Units pursuant to Section 11.3A, C, or E, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner’s failure or refusal to permit such transferee to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner.

11.5ASSIGNEES.  If the General Partner, in its sole and absolute discretion, does not consent to the admission of any transferee as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses and any other Tax Items with respect to the L.P. Units assigned to such transferee, but shall not be deemed to be a holder of L.P. Units for any other purpose under this Agreement, and shall not be entitled to vote such L.P. Units in any matter presented to the Limited Partners for a vote (such L.P. Units being deemed to have been voted on such matter in the same proportion as all other L.P. Units held by Limited Partners are voted). In the event the Assignee desires to make a further assignment of any such L.P. Units, such Assignee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of L.P. Units.

11.6EFFECT OF PROHIBITED TRANSFER.  Any transfer made in violation of Article 11 shall be null and void and of no force and effect.

11.7GENERAL PROVISIONS.

A.No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of such Limited Partner’ s L.P. Units in accordance with this Article 11, or pursuant to the tender or exchange of all of its L.P. Units pursuant to the exercise of Put Rights or Exchange Rights.

B.Any Limited Partner who shall Transfer all of its L.P. Units in a Transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such L.P. Units as Substituted Limited Partners. Similarly, any Limited Partner who shall Transfer all of its L.P. Units pursuant to a tender or exchange of all of its L.P. Units pursuant to the exercise of Put Rights or Exchange Rights shall cease to be a Limited Partner.

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C.Without the consent of the General Partner, permitted Transfers pursuant to this Article 11 may be made effective only as of the first day of a Quarter.

D.If any Partnership Interest is transferred or assigned during the year in compliance with the provisions of this Article 11, or redeemed pursuant to Section 8.7, or exchanged pursuant to the Exchange Rights Agreement on any day other than the first day of a Partnership Year, the Net Income, Net Losses, each item thereof, and all other Tax Items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the Transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which an exchange occurs shall be allocated to the exchanging Partner, provided, however, that the General Partner may adopt such other conventions relating to allocations in connection with transfers, assignments, or exchanges as it determines are necessary or appropriate. All distributions of Available Cash attributable to such L.P. Units with respect to which the Partnership Record Date is before the date of such transfer, assignment, or exchange shall be made to the transferor Partner or the exchanging Partner, as the case may be, and in the case of a Transfer or assignment other than an exchange, all distributions of Available Cash thereafter attributable to such L.P. Units shall be made to the transferee Partner.

ARTICLE 12.ADMISSION OF PARTNERS.

12.1ADMISSION OF SUCCESSOR GENERAL PARTNER.  A successor to all of the General Partner Interest pursuant to Article 11 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon the Transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement, the Acquisition Agreement, and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6D.

12.2ADMISSION OF ADDITIONAL AND SUBSTITUTED LIMITED PARTNERS.

A.A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement after the Effective Date and a Permitted Transferee pursuant to Article 11 shall be admitted to the Partnership as an Additional Limited Partner or a Substituted Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement and the Acquisition Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner.

B.Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner or a Substituted Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner’s sole and absolute discretion. The admission of any Person as an Additional Limited Partner or a Substituted

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Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission.

C.If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each other Tax Item and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner.

D.A transferee who has been admitted as a Substituted Limited Partner or an Additional Limited Partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement.

12.3AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP.  For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Appendix II) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof.

ARTICLE 13.DISSOLUTION, LIQUIDATION AND TERMINATION.

13.1DISSOLUTION.  The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. In the event of the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following (“Liquidating Events”):

(i)the expiration of its term as provided in Section 2.5 hereof;

(ii)an event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within 90 days after such event of withdrawal a majority in interest of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner;

(iii)from and after the date of this Agreement through December 31, 2048, an election to dissolve the Partnership made by the General Partner, with the Consent of Limited Partners holding 66-2/3% or more of the L.P. Units (including L.P. Units held by the Company);

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(iv)on or after January 1, 2049, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion;

(v)entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act;

(vi)the sale of all or substantially all of the assets and properties of the Partnership;

(vii)a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner.

13.2WINDING UP.

A.Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by Limited Partners holding at least a majority of the Limited Partnership Interests (the General Partner or such other Person being referred to herein as the “Liquidator”), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of beneficial interest or other securities of the Company) shall be applied and distributed in the following order:

(i)First, to the payment and discharge of all of the Partnership’s debts and liabilities to creditors other than the Partners;

(ii)Second, to the payment and discharge of all of the Partnership’s debts and liabilities to the General Partner;

(iii)Third, to the payment and discharge of all of the Partnership’s debts and liabilities to the other Partners;

(iv)Fourth, to the General Partner and Limited Partners to the extent of and in accordance with the positive balances in their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods; and

(v)The balance, if any, to the Partners according to their Percentage Interests.

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The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13.

B.Notwithstanding the provisions of Section 13.2A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any asset except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interests of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

C.In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be:

(1)distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or

(2)withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2A as soon as practicable.

13.3OBLIGATION TO CONTRIBUTE DEFICIT.  In the event the Partnership is “liquidated” within the meaning Section 1.704-1(b)(2)(ii)(G) of the Regulations, if any Partner’s Adjusted Capital Accounts are less than zero (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such Partner’s Capital Account to zero in compliance with Regulations Section 1.704-1(b)(2(ii)(B)(3).

13.4RIGHTS OF LIMITED PARTNERS.  Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Adjusted Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner

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shall have priority over any other Partner as to the return of its Adjusted Capital Contributions, distributions, or allocations.

13.5NOTICE OF DISSOLUTION.  In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners.

13.6TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP.  Upon the completion of the liquidation of the Partnership’s assets, as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the state of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.

13.7REASONABLE TIME FOR WINDING-UP.  A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation.

13.8WAIVER OF PARTITION.  Each Partner hereby waives any right to partition of the Partnership property.

13.9DEEMED DISTRIBUTION AND RECONTRIBUTION.  Notwithstanding any other provisions of this Article 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(G) but no Liquidating Event has occurred, the Property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged, and the Partnership’s affairs shall not be wound up. Instead, the Partnership shall be deemed to have distributed the Property in kind to the Partners, who shall be deemed to have assumed and taken subject to all Partnership liabilities, all in accordance with their respective Capital Accounts, and if any Partner has an Adjusted Capital Account Deficit (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs) such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2(ii)(B)(3). Immediately thereafter, the Partners shall be deemed to have recontributed the property in kind to the Partnership, which shall be deemed to have assumed and taken subject to all such liabilities.

ARTICLE 14.AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS.

14.1AMENDMENTS.

A.Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the Company) holding in the aggregate 25% or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than 15 days, and failure to

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respond in such time period shall constitute a vote which is consistent with the General Partner’s recommendation with respect to the proposal. Except as provided in Section 8.9, 13.1C., 14.1B., 14.1C. or 14.1D., a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Limited Partners holding 50% or more of the Percentage Interests of the Limited Partners (including Limited Partner Interests held by the Company).

B.Notwithstanding any provisions of Sections 8.9 and 14.1A. to the contrary, the General Partner shall have the power, without the consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes:

(1)to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners;

(2)to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement;

(3)to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.3 hereof;

(4)to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and

(5)to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law.

The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1B is taken.

C.Notwithstanding provision of Section 14.1A. and 14.1B. to the contrary, this Agreement shall not be amended without the Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner’s interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Article IV and Section 14.1B.(3) hereof); (iv) cause the termination of the Partnership prior to the time set forth in Section 2.5 or 13.1; or (v) amend this Section 14.1C. Further, no amendment may alter the restrictions on the General Partner’ s authority set forth in Section 13.1C. without the Consent specified in that section.

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14.2MEETINGS OF THE PARTNERS.

A.Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the Company) holding 25% or more of the Partnership Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than 7 days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Limited Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of the Partners or may be given in accordance with the procedure prescribed in Section 14.1A. hereof. Except as otherwise expressly provided in this Agreement, the consent of holders of a majority of the Percentage Interests held by Partners (including Limited Partnership Interests held by the Company) shall control.

B.Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

C.Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership’s receipt of written notice of such revocation from the Limited Partner executing such proxy.

D.Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Meetings of Partners may be conducted in the same manner as meetings of the shareholders of the Company and may be held at the same time, and as part of, meetings of the shareholders of the Company.

ARTICLE 15.GENERAL PROVISIONS.

15.1ADDRESSES AND NOTICE.  Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee (including electronic mail and electronic facsimile transmission if delivery in that manner has been confirmed) at the address set forth in Appendix II or such other address of which the Partner shall notify the General Partner in writing.

15.2TITLES AND CAPTIONS.  All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define,

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limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.

15.3PRONOUNS AND PLURALS.  Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

15.4FURTHER ACTION.  The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

15.5BINDING EFFECT.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

15.6CREDITORS.  Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.

15.7WAIVER.  No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

15.8COUNTERPARTS.  This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.

15.9APPLICABLE LAW.  This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof.

15.10INVALIDITY OF PROVISIONS.  If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

15.11ENTIRE AGREEMENT.  This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto.

15.12GUARANTY BY THE COMPANY. The Company unconditionally and irrevocably guarantees to the Limited Partners the performance by the General Partner of the General Partner’ s obligations under this Agreement. This guarantee is exclusively for the benefit of the Limited Partners and shall not extend to the benefit any creditor of the Partnership.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

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GENERAL PARTNER:

MISSION WEST PROPERTIES, INC., A MARYLAND CORPORATION

By:  /s/ Raymond V. Marino                                                      

Its:   President & COO                                                      

LIMITED PARTNERS:

/s/ Carl E. Berg                                                     

CARL E. BERG

/s/ Clyde J. Berg                                                     

CLYDE J. BERG

/s/ Kara Ann Berg                                                     

KARA ANN BERG

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APPENDIX I

SCHEDULE OF CONTRIBUTED PROPERTIES

APN 316-22-017 commonly known as 10050 N. De Anza Boulevard, Cupertino, CA with approximately 211,000 sq. ft. of building improvements

APN 316-22-018 commonly known as 20400 Mariani Avenue, Cupertino, CA with approximately 105,000 sq. ft. of building improvements

APPENDIX II

PARTNERS’ [ADJUSTED] CONTRIBUTIONS AND PARTNERSHIP INTERESTS

Name and Percentage Address Interest of Partner	Agreed Value of Contributed Property Cash	Units	*Partnership Interest %
GENERAL PARTNER	$35,631,800
Mission West Properties, Inc. 10050 Bandley Drive Cupertino, CA 95014		2,510,815	21.86%
LIMITED PARTNERS
Carl E. Berg 10050 Bandley Drive Cupertino, CA 95014	$103,179,000	7,271,656	63.30%
Clyde J. Berg 10050 Bandley Drive Cupertino, CA 95014	$15,077,500	1,0661,890	9.25%
Kara Ann Berg 10050 Bandley Drive Cupertino, CA 95014	$9,111,700	642,699	5.59%

 

*      Identical to Partnership Interest Percentage in Mission West Properties L.P. I

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APPENDIX III

ALLOCATIONS OF PARTNERSHIP INTERESTS

1.           ALLOCATION OF NET INCOME AND NET LOSS.

(a)           NET INCOME.  Except as otherwise provided in this Appendix III, Net Income (or items thereof) (other than Net Income, or items thereof, arising in connection with a Terminating Capital Transaction) for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests.

(b)           NET LOSS.  Except as otherwise provided in this Appendix III, Net Loss (or items thereof) of the Partnership for each fiscal year or other applicable period shall be allocated to the Partners in accordance with the Partners’ respective Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) allocated to a Partner under this subparagraph (b) would cause such Partner (hereinafter, a “Restricted Partner”) to have an Adjusted Capital Account Deficit, or increase the amount of an existing Adjusted Capital Account Deficit, as of the end of the fiscal year or other applicable period to which such Net Loss relates, such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the “Permitted Partners”) pro rata in accordance with each Permitted Partner’s Percentage Interest.

(c)           TERMINATING CAPITAL TRANSACTION; LIQUIDATION.  Allocations of Net Income or Net Loss (or items thereof) in connection with a Terminating Capital Transaction or Liquidation of the Partnership shall first be made so that, to the extent possible, each Partner’s Capital Account balance is equal to such Partner’s Adjusted Contribution, and the remainder of such Net Income or Net Loss (or items thereof) shall be allocated to the Partners in accordance with their Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) would be allocated to a Restricted Partner under this subparagraph (c), such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the Permitted Partners pro rata in accordance with each Permitted Partner’s Percentage Interest.

(d)           RULES OF CONSTRUCTION.

(1)           CAPITAL ACCOUNT INCREASES.  For purposes of making allocations pursuant to subparagraph 1(c) of this Appendix III, a Partner’s Capital Account balance shall be deemed to be increased by such Partner’s share of any Partnership Minimum Gain and Partner Minimum Gain remaining at the close of the fiscal period in respect of which such allocations are being made.

(2)           CHANGE IN PERCENTAGE INTERESTS.  In the event any Partner’s Percentage Interest changes during a fiscal year for any reason, including without limitation, the Transfer of any interest in the Partnership, the tax allocations contained in this Appendix III shall be applied as necessary to reflect the varying interests of the Partners during such year.

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2.           SPECIAL ALLOCATIONS.

Notwithstanding any provisions of paragraph 1 of this Appendix III, the following special allocations shall be made.

(a)           MINIMUM GAIN CHARGEBACK (NONRECOURSE LIABILITIES).  Except as otherwise provided in Section 1.704-2(f) of the Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partnership Minimum Gain to the extent required by Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Sections 1.704-2(f) and (j)(2) of the Regulations. This subparagraph 2(a) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(a) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto.

(b)           PARTNER MINIMUM GAIN CHARGEBACK.  Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704- 2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner’s share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This subparagraph 2(b) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(b) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto.

(c)           QUALIFIED INCOME OFFSET.  In the event a Partner unexpectedly receives any adjustments, allocations or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has an Adjusted Capital Account Deficit, items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible as required by the Regulations. This subparagraph 2(c) is intended to constitute a “qualified income offset” under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

(d)           OTHER CHARGEBACK OF IMPERMISSIBLE NEGATIVE CAPITAL ACCOUNT.  To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this paragraph 2(d) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Appendix III have been tentatively made as if this paragraph 2(d) were not in the Agreement.

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(e)           NONRECOURSE DEDUCTIONS.  Nonrecourse Deductions for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests.

(f)           PARTNER NONRECOURSE DEDUCTIONS.  Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Regulations).

(g)           INTENT OF ALLOCATIONS.  The parties intend that the allocation provisions of this Appendix III shall result in final Capital Account balances of the Partners that initially are equal to each Partner’s Adjusted Contribution and are then in proportion to the Partners’ respective Percentage Interests, so that when liquidating distributions are made in accordance with such final Capital Account balances under Section 13.2A(4) hereof, such distributions will be able to return to each Partner its Adjusted Contribution and then will be made in proportion to the Partners’ respective Percentage Interests. To the extent that such final Capital Account balances do not so reflect the provisions of this Appendix III, income and loss of the Partnership for the current year and future years, as computed for book purposes, shall be allocated among the Partners so as to result in final Capital Account balances reflecting the provisions of this Appendix III, and to the extent such allocations of items of income (including gross income) and deduction do not result in such final Capital Account balances, then, income and loss of the Partnership for prior open years, as computed for book purposes (or items of gross income and deduction of the Partnership for such years, as computed for book purposes) shall be reallocated among the Partners consistent with the foregoing. This subparagraph shall control notwithstanding any reallocation of income, loss, or items thereof, as computed for book purposes, by the Internal Revenue Service or any other taxing authority.

(h)           SECTION 754 ADJUSTMENT.  To the extent an adjustment to the adjusted tax basis of any asset of the Partnership pursuant to Section 734(b) of the Code or Section 743(b) of the Code is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated among the Partners in a manner consistent with the manner in which each of their respective Capital Accounts are required to be adjusted pursuant to such section of the Regulations.

(i)           GROSS INCOME ALLOCATION.  There shall be specially allocated to the General Partner an amount of Partnership income and gain during each Partnership Year or portion thereof, before any other allocations are made hereunder, which is equal to the excess, if any, of the cumulative distributions of cash made to the General Partner under Section 7.3B hereof over the cumulative allocations of Partnership income and gain to the General Partner pursuant to this Section (i) of this Appendix III.

3.           TAX ALLOCATIONS.

(a)           ITEMS OF INCOME OR LOSS.  Except as is otherwise provided in this Appendix III, an allocation of Partnership Net Income or Net Loss to a Partner shall be treated as an allocation to such Partner of the same share of each item of income, gain, loss, deduction and item of tax-exempt income or Section 705(a)(2)(B) expenditure (or item treated as such expenditure pursuant to

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Regulations Section 1.704-1(b)(2)(iv)(i)) (“Tax Items”) that is taken into account in computing Net Income or Net Loss.

(b)           SECTION 1245/1250 RECAPTURE.  If any portion of gain from the sale of Partnership assets is treated as gain which is ordinary income by virtue of the application of Code Sections 1245 or 1250 (“Affected Gain”), then such Affected Gain shall be allocated among the Partners in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated. This subparagraph 3(b) shall not alter the amount of Net Income (or items thereof) allocated among the Partners, but merely the character of such Net Income (or items thereof). For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income and Net Loss for such respective period.

(c)           PRECONTRIBUTION GAIN.  The Partnership may elect the traditional method of allocation contained in Section 1.704- 3(b) of the Regulations to take into account any variation between the adjusted basis and the fair market value of the Initial Contributed Property at the time of the contribution (“Precontribution Gain”) on a Property-by-Property basis. By executing this Agreement, each Partner hereby agrees to report income, gain, loss and deduction on such Partner’s federal income tax return in a manner that is consistent with the use of the traditional method of allocation with respect to the Initial Contributed Property. With respect to any Contributed Property, the Partnership shall use any permissible method contained in the Regulations promulgated under Section 704(c) of the Code selected by the General Partner, in its sole discretion, to take into account any variation between the adjusted basis of such asset and the fair market value of such asset as of the time of the contribution. Each Partner hereby agrees to report income, gain, loss and deduction on such Partner’s federal income tax return in a manner consistent with the method used by the Partnership.

(d)           ALLOCATIONS RESPECTING SECTION 704(C) AND REVALUATIONS.  If any asset has a Gross Asset Value which is different from the Partnership’s adjusted basis for such asset for federal income tax purposes because the Partnership has revalued such asset pursuant to Regulations Section 1.704-1(b)(2)(iv)(f), the allocations of Tax Items shall be made in accordance with the principles of Section 704(c) of the Code and the Regulations and the methods of allocation promulgated thereunder, provided, however, that the General Partner shall elect with respect to each Initial Contributed Property, to allocate the income, gain, loss and deduction with respect to such Property using the “traditional method” described in Regulations Section 1.704-3(b) unless the majority of the Limited Partners affected thereby otherwise instruct the General Partner. The intent of this Section 3(d) and Section 3(c) above is that each Partner who contributed to the capital of the Partnership a Contributed Property will bear, through reduced allocations of depreciation, increased allocations of gain or other items, the tax detriments associated with any Precontribution Gain. This Section 3(d) and Section 3(c) are to be interpreted consistently with such intent.

(e)           EXCESS NONRECOURSE LIABILITY SAFE HARBOR.  Pursuant to Regulations Section 1.752-3(a)(3), solely for purposes of determining each Partner’s proportionate share of the “excess nonrecourse liabilities” of the Partnership (as defined in Regulations Section 1.752-3(a)(3)), the Partners’ respective interests in Partnership profits shall be determined in accordance with each Partner’s Percentage Interest; provided, however, that each Partner who has contributed an asset to the Partnership shall be allocated, to the extent possible, a share of “excess nonrecourse liabilities” of the Partnership which results in such Partner being allocated nonrecourse liabilities in an amount which is at least equal to the amount of income pursuant to Section 704(c) of the Code and the

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 Regulations promulgated thereunder (the “Liability Shortfall”). In the event there is an insufficient amount of nonrecourse liabilities to allocate to each Partner an amount of nonrecourse liabilities equal to the Liability Shortfall, then an amount of nonrecourse liabilities in proportion to, and to the extent of, the Liability Shortfall shall be allocated to each Partner.

(f)           REFERENCES TO REGULATIONS.  Any reference in this Appendix III or the Agreement to a provision of proposed and/or temporary Regulations shall, in the event such provision is modified or renumbered, be deemed to refer to the successor provision as so modified or renumbered, but only to the extent such successor provision applies to the Partnership under the effective date rules applicable to such successor provision.

(g)           SUCCESSOR PARTNERS.  For purposes of this Appendix III, a transferee of a Partnership Interest shall be deemed to have been allocated the Net Income, Net Loss and other items of Partnership income, gain, loss, deduction and credit allocable to the transferred Partnership Interest that previously have been allocated to the transferor Partner pursuant to this Agreement.

(h)           LIMITATION TO PRESERVE REIT STATUS.  Notwithstanding anything else in this Agreement, to the extent that the amount paid, credited, distributed or reimbursed by the Partnership or any Partners to, for or with respect any Partner that is a REIT (“REIT Partner”) or its officers, directors, employees or agents, whether as a reimbursement, fee, expense or indemnity (a “REIT Payment”), would constitute gross income to the REIT Partner for purposes of Section 856 (c)(2) or Section 856(c)(3) of the Code, then, notwithstanding any other provision of this Agreement, the amount of such REIT Payments, as selected by the General Partner in its discretion from among items of potential distribution, reimbursement, fees, expenses and indemnities, shall be reduced for any Fiscal Year so that the REIT Payments, as so reduced, to, for or with respect to such REIT Partner shall not exceed the lesser of:

(i)           an amount equal to the excess, if any, of (x) four and nine-tenths percent (4.9%) of the REIT Partner total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (H) of Section 856(c)(2) over (y) the amount of gross income (within the meaning of Section 856(c)(2)) derived by the REIT Partner from sources other than those described in subsections (A) through (H) of Section 856(c)(2) (but not including the amount of any REIT Payments); or

(ii) an amount equal to the excess, if any, of (x) 24% of the REIT Partner’s total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (I) of Section 856(c)(3) over (y) the amount of gross income (within the meaning of Section 856(c)(3)) derived by the REIT Partner from sources other than those described in subsections (A) through (I) of Section 856(c)(3) (but not including the amount of any REIT Payments);

PROVIDED, HOWEVER, that REIT payments in excess of the amounts set forth in clauses (i) and (ii) above may be made if the General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts shall not adversely affect the REIT Partner’s ability to qualify as a REIT. To the extent that REIT Payments may not be made in a Fiscal Year as a consequence of the limitations set forth in this Section 3(h), such REIT Payments shall carry over and shall be treated as arising in the following Fiscal Year. Nothing in this Section 3(h) shall permit the General Partner to allocate income of the Partnership to any Partner in excess of the income that would otherwise be allocated to it under Article 6 without regard to this Section 3(h). The purpose of

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the limitations contained in this Section 3(h) is to prevent any REIT Partner from failing to qualify as a REIT under the Code by reason of such REIT Partner’s share of items, including distributions, reimbursements, fees, expenses or indemnities, receivable directly or indirectly from the Partnership or the Partners, and this Section 3(h) shall be interpreted and applied to effectuate such purpose.

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EX-10.1.6

EXHIBIT 10.1.6

AGREEMENT OF LIMITED PARTNERSHIP

OF

MISSION WEST PROPERTIES, L.P. V

This AGREEMENT OF LIMITED PARTNERSHIP OF MISSION WEST PROPERTIES, L.P. V (this “Agreement”), dated as of December 21, 2011, is entered into by and among Mission West Properties, Inc., a Maryland corporation (the “Company” or the “General Partner”) and the limited partners whose names are set forth on Appendix I attached hereto (as it may be amended from time to time).

WHEREAS, Mission West Properties, L.P. V (the “Partnership”) has been organized as a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware by filing a certificate of limited partnership with the Secretary of State of the State of Delaware on December 22, 2011 and certain properties listed in Appendix I have been contributed to the Partnership;

WHEREAS, pursuant to the terms of a Partnership Division Agreement dated as of December 21, 2011 (the “Division Agreement”), and the performance of the transactions contemplated thereby, the partnership units in the Partnership have been distributed to the Company and the limited partners in redemption of certain partnership units in Mission West Properties II, L.P. the Company is becoming the sole general partner in the Partnership, and the limited partners are being admitted as the holders of units of partnership interests in the Partnership, which partnership interests are identical to the partnership interests held by the Company and the limited partners in Mission West Properties, L.P. II as set forth on Appendix II, as follows:

Partner	Partnership Interests Mission West Properties L.P. II (%)	Partnership Interests Mission West Properties L.P. V (%)
Mission West Properties, Inc.	16.32%	16.32%
Carl E. Berg	41.84%	41.84%
Clyde J. Berg	41.84%	41.84%

and

WHEREAS, it is the intent of the parties to this Agreement that the effect of the division and creation and distribution of the Partnership pursuant to the Division Agreement, and this Agreement shall be so construed, such that the relative rights, interests and obligations of the Partners among themselves shall be unaffected as a result of such transactions and shall be the same as they were under the limited partnership agreement of the predecessor-in-interest Mission West Properties, L.P. II.

NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows:

ARTICLE 1.DEFINED TERMS.

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the following terms used in this Agreement.

1.1“ACT” the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute.

1.2“ACQUISITION AGREEMENT” means the agreement dated as of May 14, 1998, as amended as of July 1, 1998, and December 30, 2011 among the Partnership, the other partnerships comprising the Operating Partnership, all of the partners therein, and the Company concerning the acquisition of the Berg Properties, the Acquired Properties and the Pending Development Projects by the Operating Partnership, the Company’s investment in and admission to the Operating Partnership as sole general partner, and the rights and options of the limited partners in the Operating Partnership to tender L.P. Units or acquire shares of Common Stock under certain circumstances.

1.3“ADDITIONAL LIMITED PARTNER” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.3 hereof and who is shown as such on the books and records of the Partnership.

1.4“ADJUSTED CAPITAL ACCOUNT DEFICIT” means with respect to any Partner, the negative balance, if any, in such Partner’s Capital Account as of the end of any relevant fiscal year, determined after giving effect to the following adjustments:

(a)credit to such Capital Account any portion of such negative balance which such Partner (i) is treated as obligated to restore to the Partnership pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or (ii) is deemed to be obligated to restore to the Partnership pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and

(b)debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations.

1.5“ADJUSTED CONTRIBUTION” means the Capital Contributions of any Partner reduced by the total distributions to such Partner from Capital Events occurring subsequent to the Closing Date under the Division Agreement.  For purposes of this Agreement, the initial Capital Contribution of the Company shall equal the amounts set forth on Appendix II which is its share of the fair market value of the properties contributed to the Partnership by Mission West Properties, L.P. II and the initial Capital Contribution of each Limited Partner shall equal the amounts set forth on Appendix II which is the Limited Partner’s share of the fair market value of the properties contributed to the Partnership by Mission West Properties, L.P. II as further set forth in Appendix I of the Division Agreement.

1.6“AFFILIATE” means, (a) with respect to any individual Person, any member of the Immediate Family of such Person or a trust established for the benefit of such member, or (b) with respect to any Entity, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, any such Entity.

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1.7“AGREEMENT” means this Amended and Restated Agreement of Limited Partnership, as originally executed and as amended, modified, supplemented or restated from time to time, as the context requires.

1.8“ARTICLES OF INCORPORATION” means the Articles of Incorporation of the Company, as amended and restated from time to time, or the articles of incorporation, certificate of incorporation, operating agreement of other Charter instrument of any corporation or other entity which is a successor to the Company by merger or consolidation.

1.9“ASSIGNEE” means a Person to whom one or more L.P. Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5.

1.10“AVAILABLE CASH” means the Partnership’s share of the Operating Partnership’s Available Cash (as defined in the Acquisition Agreement) with respect to the applicable period of measurement (i.e., any period beginning on the first day of the fiscal year, quarter or other period commencing immediately after the last day of the fiscal year, quarter or other applicable period for purposes of the prior calculation of Available Cash for or with respect to which a distribution has been made, and ending on the last day of the fiscal year, quarter or other applicable period immediately preceding the date of the calculation). Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, nor shall the calculation of Available Cash take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership.

1.11“BERG ACQUISITION” has the meaning set forth in the Acquisition Agreement.

1.12“BERG GROUP” means Carl E. Berg, Clyde J. Berg, the members of their respective Immediate Families, and any Entity which is an Affiliate of either Carl E. Berg or Clyde J. Berg, excluding the Partnership and the Company.

1.13“BERG LAND HOLDINGS” means certain land held by members of the Berg Group which the Operating Partnership may acquire under certain circumstances pursuant to the terms of the Acquisition Agreement and the related Berg Land Holdings Option Agreement to be entered into by the parties thereto upon approval of certain transactions by the Company’s shareholders.

1.14“CAPITAL ACCOUNT” means with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions:

(a)to each Partner’s Capital Account there shall be credited (i) such Partner’s Initial Capital Contribution as of the effective date of this Agreement (ii) such Partner’s Capital Contributions subsequent to the Effective Date of this Agreement, (iii) such Partner’s distributive share of Net Income and any items in the nature of income or gain which are specially allocated to such Partner pursuant to Sections 1 and 2 of Appendix III and (iv) the amount of any Partnership liabilities assumed by such Partner or which are secured by any asset distributed to such Partner;

(b)to each Partner’s Capital Account there shall be debited (i) the amount of cash and the Gross Asset Value of any Property distributed to such Partner pursuant to any provision of this Agreement, (ii) such Partner’s distributive share of Net Losses and any

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   items in the nature of expenses or losses which are specially allocated to such Partner pursuant to Sections 1 and 2 of Appendix II, and (iii) the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any asset contributed by such Partner to the Partnership to the extent not assumed by the Partner; and

(c)in the event all or a portion of a Partnership Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall reasonably determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed assets or which are assumed by the Partnership, the General Partner or any Limited Partner) are computed in order to comply with such Regulations, the General Partner may make such modification; provided that it does not have an adverse effect on the amounts distributable to any Partner pursuant to Article 13 hereof upon the dissolution of the Partnership.

1.15“CAPITAL CONTRIBUTION” means, with respect to any Partner, any cash, cash equivalents or the Gross Asset Value of property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Article 4 hereof.

1.16“CAPITAL EVENT” means any Partnership transaction not in the ordinary course of its business, including, without limitation, distribution to the Partners in excess of distributive shares of income, principal payments, prepayments, prepayment penalties, sales, exchanges, foreclosures or other dispositions of Property owned by the Partnership, recoveries of damage awards and insurance proceeds not used to rebuild (other than the receipt of contributions to the capital of the Partnership and business or rental interruption insurance proceeds not used to rebuild).

1.17“CERTIFICATE” means the Certificate of Limited Partnership relating to the Partnership to be filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act.

1.18“CHANGE OF CONTROL TRANSACTION” shall mean (A) any transaction or series of transactions occurring after the Effective Date, in which all Limited Partners in the Operating Partnership are legally entitled to participate and pursuant to which L.P. Units representing more than 50% of the total outstanding L.P. Units of the Operating Partnership are purchased by a Person not controlled by, in control of or under common control with the Company, any Affiliate of the Company or any Affiliate of a Limited Partner, (B) the merger or consolidation of the Partnership with another entity (other than a merger or consolidation in which the holders of L.P. Units of the Partnership immediately before the merger or consolidation own immediately after the merger or consolidation, Voting Securities of the surviving or acquiring Entity or a parent party of such surviving or acquiring Entity, possessing more than 50% of the voting power of the surviving or acquiring Entity or parent party) resulting in the exchange of the outstanding L.P. Units of the Partnership for cash, securities or other property, or (C) any merger, sale, lease, license, exchange or other disposition (whether in one transaction or a series of related transactions) of more than 50% of the assets of the Partnership.

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1.19“CHARTER” has the meaning set forth in Rule 405 of Regulation C promulgated by the SEC under the Securities Act (“Rule 405”).

1.20“CODE” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

1.21“COMMON STOCK” means a share of Common Stock of the Company or any shares of Voting Securities into which the Common Stock may be reclassified or converted or for which shares of Common Stock may be exchanged in any transaction made applicable or available to all holders of Common Stock as a class.

1.22“COMMON STOCK PRICE” means with respect to a particular valuation event identified under this Agreement, the last reported sales price regular way on such date or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way on such date, in either case on the Nasdaq Stock Market, the New York Stock Exchange, or if the Common Stock is not then listed or admitted to trading on any such exchange, any comparable system on which the Common Stock is then listed or admitted to trading or, if not then listed or admitted to trading on any national securities exchange, any comparable system for the 10-trading day period ending with the last day preceding the date of the valuation event.

1.23“COMPANY” means Mission West Properties, a California corporation, and any successor to such corporation.

1.24“CONSENT” means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof.

1.25“DEPRECIATION” means, with respect to any asset of the Partnership for any fiscal year or other period, the depreciation, depletion, amortization or other cost recovery deduction, as the case may be, allowed or allowable for federal income tax purposes in respect of such asset for such fiscal year or other period; provided, however, that except as otherwise provided in Section 1.704-2 of the Regulations, if there is a difference between the Gross Asset Value (including the Gross Asset Value, as increased pursuant to paragraph (d) of the definition of Gross Asset Value) and the adjusted tax basis of such asset at the beginning of such fiscal year or other period, Depreciation for such asset shall be an amount that bears the same ratio to the beginning Gross Asset Value of such asset as the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such fiscal year or other period bears to the beginning adjusted tax basis of such asset; provided, further, that if the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such asset for such fiscal year or other period is zero, Depreciation of such asset shall be determined with reference to the beginning Gross Asset Value of such asset using any reasonable method selected by the General Partner.

1.26“DIVIDEND REINVESTMENT PLAN” has the meaning set forth in Rule 405.

1.27“EFFECTIVE DATE” means the date of closing of the Berg Acquisition.

1.28“EMPLOYEE BENEFIT PLAN” has the meaning set forth in Rule 405.

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1.29“ENTITY” means any general partnership, limited partnership, corporation, joint venture, trust, business trust, real estate investment trust, limited liability company, cooperative or association.

1.30“EQUITY SECURITY” has the meaning set forth in Rule 405.

1.31“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time (or any corresponding provisions of succeeding laws).

1.32“EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

1.33“EXCHANGE FACTOR” has the meaning set forth in the Exchange Rights Agreement, and is equal to the number of L.P. Units exchangeable for one share of Common Stock, from time to time, under the Exchange Rights Agreement.

1.34“EXCHANGE RIGHT” has the meaning set forth in the Exchange Rights Agreement.

1.35“EXCHANGE RIGHTS AGREEMENT” means Exchange Rights Agreement among the Company, and each of the limited partners of the partnerships comprising the Operating Partnership.

1.36“GAAP” means United States generally accepted accounting principles, as in effect from time to time.

1.37“GENERAL PARTNER” means the general partner of the Partnership, if there is more than one general partner, all such general partners.

1.38“GENERAL PARTNER INTEREST” means a Partnership Interest held by the General Partner, in its capacity as general partner. A General Partner Interest may be expressed as a number of Units, each of which shall represent the same Percentage Interest in the Partnership as one L.P. Unit.

1.39“GROSS ASSET VALUE” means, with respect to any asset of the Partnership, such asset’s adjusted basis for federal income tax purposes, except as follows:

(a)the initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, without reduction for liabilities, as determined by the contributing Partner and the Partnership on the date of contribution thereof;

(b)if the General Partner reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Partners, the Gross Asset Values of all Partnership assets shall be adjusted in accordance with Sections 1.704-1(b)(2)(iv)(f) and (g) of the Regulations to equal their respective gross fair market values, without reduction for liabilities, as reasonably determined by the General Partner, as of the following times:

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(1)a Capital Contribution (other than a de minimis Capital Contribution) to the Partnership by a new or existing Partner as consideration for a Partnership Interest; or

(2)the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership assets as consideration for the repurchase of a Partnership Interest; or

(3)the liquidation of the Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations;

(c)the Gross Asset Values of Partnership assets distributed to any Partner shall be the gross fair market values of such assets (taking Section 7701(g) of the Code into account) without reduction for liabilities, as reasonably determined by the General Partner as of the date of distribution; and

(d)the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations (as set forth in Appendix III); provided, however, that Gross Asset Values shall not be adjusted pursuant to this paragraph (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d).

At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Partnership’s assets for purposes of computing Net Income and Net Loss.

1.40“IMMEDIATE FAMILY” means, with respect to any Person, such Person’s spouse, parents, parents-in-law, children, nephews, nieces, brothers, sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law and daughters-in-law or any trust solely for the benefit of any of the foregoing family members whose sole beneficiaries include the foregoing family members.

1.41“INCAPACITY” OR “INCAPACITATED” means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause

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(b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof; (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within 90 days after the expiration of any such stay.

1.42“INDEMNITEE” means (i) any Person made a party to a proceeding by reason of (A) such Person’s status as (1) the General Partner, (2) a director, trustee or officer of the Partnership or the General Partner, or (3) a director, trustee or officer of any other Entity, each Person serving in such capacity at the request of the Partnership or the General Partner, or (B) his or its liabilities, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to); and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion.

1.43[Reserved]

1.44“LIEN” means, with respect to any asset of the Partnership, (i) any mortgage, deed of trust, lien, pledge, encumbrance, charge, restriction or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

1.45“LIMITED PARTNER” means any Person named as a Limited Partner in Appendix II, as such Appendix may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a Limited Partner of the Partnership.

1.46“LIMITED PARTNER INTEREST” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of L.P. Units.

1.47“LIQUIDATING EVENT” has the meaning set forth in Section 13.1 hereof.

1.48“LIQUIDATOR” has the meaning set forth in Section 13.2 hereof.

1.49“L.P. UNIT” means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1, 4.2 and 4.3. The number of L.P. Units outstanding and the Percentage Interests in the Partnership represented by such L.P. Units are set forth in Appendix II, as such Appendix may be amended from time to time. The ownership of L.P. Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the L.P. Units shall be uncertificated securities.

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1.50“L.P. UNIT MAJORITY” means the Limited Partners holding the right to vote, in the aggregate, a majority of the total number of L.P. Units outstanding in the Operating Partnership.

1.51“NET INCOME” OR “NET LOSS” means, for each fiscal year or other applicable period, an amount equal to the Partnership’s taxable income or loss for such year or period as determined for federal income tax purposes by the General Partner, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), adjusted as follows: (a) by including as an item of gross income any tax-exempt income received by the Partnership and not otherwise taken into account in computing Net Income or Net Loss; (b) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code (or which is treated as a Section 705(a)(2)(B) expenditure pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations) and not otherwise taken into account in computing Net Income or Net Loss, including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership and by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property disallowed pursuant to Section 267(a)(1) or 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code; (c) by taking into account Depreciation in lieu of depreciation, depletion, amortization and other cost recovery deductions taken into account in computing taxable income or loss; (d) by computing gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (e) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (g) of the Regulations, by taking into account the amount of such adjustment as if such adjustment represented additional Net Income or Net Loss pursuant to Appendix III; and (f) by not taking into account in computing Net Income or Net Loss items separately allocated to the Partners pursuant to Sections 1 and 2 of Appendix III.

1.52“NEW EQUITY FINANCING RIGHT” has the meaning set forth in Section 8.8.

1.53“NONRECOURSE DEDUCTIONS” has the meaning set forth in Regulations Sections 1.704-2(b)(1) and 1.704-2(c).

1.54“NONRECOURSE LIABILITIES” has the meaning set forth in Regulations Section 1.704-2(b)(3).

1.55“OPERATING PARTNERSHIP” means, collectively, Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III, Mission West Properties, L.P. IV and Mission West Properties, L.P. V.

1.56“PARTNER” means the General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners collectively.

1.57“PARTNER MINIMUM GAIN” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

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1.58“PARTNER NONRECOURSE DEBT” has the meaning set forth in Regulations Section 1.704-2(b)(4).

1.59“PARTNER NONRECOURSE DEDUCTIONS” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

1.60“PARTNERSHIP” means the limited partnership governed by this Agreement, and any successor thereto.

1.61“PARTNERSHIP INTEREST” means an ownership interest in the Partnership representing an Adjusted Contribution by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of L.P. Units.

1.62“PARTNERSHIP MINIMUM GAIN” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

1.63“PARTNERSHIP RECORD DATE” means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1, which shall be the same as the record date established by the Company for a distribution to its shareholders of some or all of its portion of such distribution.

1.64“PARTNERSHIP YEAR” means the fiscal year of the Partnership, which is the calendar year, as set forth in Section 9.2.

1.65“PENDING DEVELOPMENT PROJECTS” means three Berg Group-owned R&D Property development projects which the Operating Partnership has agreed to acquire upon their completion pursuant to the terms of the Acquisition Agreement and the related Pending Projects Option Agreement to be entered into by the parties thereto upon the approval of certain transactions by the Company’s shareholders.

1.66“PARTNERSHIP INTEREST” means, as to a Partner, the fractional part of the Partnership Interests owned by such Partner and expressed as a percentage as specified in Appendix II, as such Appendix may be amended from time to time.

1.67“PERMITTED PARTNERS” has the meaning set forth in Section 1(b) of Appendix III.

1.68“PERMITTED TRANSFEREE” means any person to whom L.P. Units are Transferred in accordance with Section 11.3 of this Agreement.

1.69“PERSON” means an individual or Entity.

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1.70“PRECONTRIBUTION GAIN” has the meaning set forth in Section 3(c) of Appendix III.

1.71“PUT RIGHTS” shall have the meaning provided in Section 8.7.

1.72“PROTECTIVE PROVISIONS EXPIRATION DATE” means the date on which the members of the Berg Group own less than 15% of the Common Stock, treating all Equity Securities of the Company and all L.P. Units owned by such members as Common Stock outstanding for this purpose.

1.73[Reserved]

1.74“QUARTER” means each of the three month periods ending on March 31, June 30, September 30 and December 31.

1.75“REGULATIONS” means the final, temporary or proposed Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

1.76“REIT” means a real estate investment trust as defined in Section 856 of the Code.

1.77“REIT REQUIREMENTS” means all of the requirements imposed under the Code on any entity seeking to qualify and remain qualified as a REIT.

1.78“RESTRICTED PARTNER” has the meaning set forth in Section 1(b) of Appendix III.

1.79“SEC” means the U.S. Securities and Exchange Commission.

1.80“SECURITIES ACT” means the Securities Act of 1933, as amended.

1.81“STOCK OPTION PLAN” means the Company’s 1997 Stock Option Plan and any other plan adopted from time to time by the Company pursuant to which shares of Common Stock are issued, or options to acquire shares of Common Stock are granted, to consultant, employees or directors of the Company, the Operating Partnership or their respective Affiliates in consideration for services or future services.

1.82“SUBSIDIARY” means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the Voting Securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person.

1.83“SUBSTITUTED LIMITED PARTNER” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4 hereof.

1.84“TAX ITEMS” has the meaning set forth in Appendix III.

1.85“TERMINATING CAPITAL TRANSACTION” means any Change of Control Transaction.

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1.86“TOTAL MARKET CAPITALIZATION” means the market value of the outstanding Common Stock determined as if all L.P. Units in the Operating Partnership had been converted into Common Stock at the Exchange Factor plus the total debt of the Company and the Operating Partnership.

1.87“TRANSFER” as a noun, means any sale, assignment, conveyance, pledge, hypothecation, gift, encumbrance or other transfer, and as a verb, means to sell, assign, convey, pledge, hypothecate, give, encumber or otherwise transfer.

1.88“UNIT” means an equal undivided interest in all of the outstanding Partnership Interests.

1.89“UNITED STATES PERSON” means a holder of L.P. Units who is an individual who is a citizen or resident of the United States; a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any State; an estate the income of which from sources without the United States is includable in gross income for United States federal income tax purposes; a trust the primary supervision of which is exercisable by a court within the United States and having one or more United States fiduciaries with authority to control all substantial decisions of such trust; and any Person whose income or gain in respect of the L.P. Units is effectively connected with the conduct of a United States trade or business.

1.90“VOTING SECURITIES” means any Equity Security which entitles the holder thereof to vote on all matters submitted for a vote of equity holders by the issuer of such Equity Security, including the right to vote for directors in the case of a corporation.

Certain additional terms and phrases have the meanings set forth in Appendix III.

ARTICLE 2.ORGANIZATIONAL MATTERS.

2.1CONTINUATION.  The Partners hereby agree to continue the Partnership under and pursuant to the Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.

2.2NAME.  The name of the Partnership shall be Mission West Properties, L.P. IV. The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership,” “L.P.,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary to comply with the laws of any jurisdiction. The General Partner in its sole and absolute discretion may, upon 5 days’ prior written notice to the Limited Partners, change the name of the Partnership.

2.3REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE.  The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, 1029 Orange Street, Wilmington, Delaware 19801. The principal office of the Partnership shall be 10050 Bandley Drive, Cupertino, California 95014, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership

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may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable.

2.4POWER OF ATTORNEY.

A.Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to:

(1)execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property, including, without limitation, any documents necessary or advisable to convey any Contributed Property to the Partnership; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13, or the Capital Contribution of any Partner; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interest; and

(2)execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement.

Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14, or as may be otherwise expressly provided for in this Agreement.

B.The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the Transfer of all or any portion of such Limited Partner’s or Assignee’s L.P. Units and shall extend to such Limited Partner’s

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or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner’s or Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.

2.5TERM.  The term of the Partnership shall commence on the date hereof and shall continue until December 31, 2048, unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law.

ARTICLE 3.PURPOSE.

3.1PURPOSE AND BUSINESS.  The purpose and nature of the business to be conducted by the Partnership is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act including, without limitation, to engage in the following activities: to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with  real property and personal property of all kinds; to undertake such other activities as may be necessary, advisable, desirable or convenient to the business of the Partnership; and to engage in such other ancillary activities as shall be necessary or desirable to effectuate the foregoing purposes.

3.2POWERS.  The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business for which it has been formed and for the protection and benefit of the Partnership; provided, that the Partnership shall not take, and shall refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Company to continue to qualify as a REIT; (ii) could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Company or its securities, unless such action (or inaction) shall have been specifically consented to by the Company, if not the General Partner, and the L.P. Unit Majority.

ARTICLE 4.CAPITAL CONTRIBUTIONS.

4.1CAPITAL CONTRIBUTIONS OF THE PARTNERS.

A.At the time of the execution of this Agreement, the Partners have been credited with the Adjusted Contributions, contemplated by the Division Agreement, as set forth in Appendix II to this Agreement. Each Limited Partner shall own L.P. Units in the amount set forth for such Partner in Appendix II and shall have a Percentage Interest in the Partnership as set forth in Appendix II, which shall be adjusted in Appendix II from time to time by the General Partner to the extent necessary to reflect accurately exchanges, additional Capital Contributions, the issuance of additional Partnership Interests, the exercise of Put Rights with respect to L.P. Units or similar events having an effect on any Partner’s Percentage Interest.

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B.The number of Units held by the General Partner, in its capacity as general partner, shall be deemed to be the General Partner Interest. Except as provided in Sections 4.2, 10.5 and 13.3, the Partners shall have no obligation to make any additional Capital Contributions.

4.2ADDITIONAL FUNDS; RESTRICTIONS ON COMPANY.

A.The sums of money required to finance the business and affairs of the Partnership shall be derived from the initial Capital Contributions made to the Partnership by the Company as set forth in the Acquisition Agreement and from funds generated from the operation and business of the Partnership including, without limitation, distributions directly or indirectly received by the Partnership from Available Cash provided by the Operating Partnership. In the event additional financing is needed from sources other than as set forth in the preceding sentence for any reason, subject to the provisions of Sections 8.8 and 8.9, the General Partner may, in its discretion, in such amounts and at such times as it solely shall determine to be necessary or appropriate, obtain additional funds for the Operating Partnership which shall be allocated to each of the partnerships included therein, including the Partnership, pro rata in proportion to the ratio of the number of Units then outstanding in each such Partnership to the total number of L.P. Units then outstanding in the Operating Partnership taken as a whole (“Pro Rata Share”). Accordingly, to the extent of such Pro Rata Share of the Partnership and subject to Section 8.9 and any other limitations contained in this Agreement or the Acquisition Agreement, the General Partner may, (i) cause the Partnership to issue additional Partnership Interests and admit additional Limited Partners to the Partnership in accordance with Section 4.3; (ii) make additional Capital Contributions to the Partnership (subject to the provisions of Section 4.2B.); (iii) cause the Partnership to borrow money, enter into loan arrangements, issue debt securities, obtain letters of credit or otherwise borrow money on a secured or unsecured basis; or (iv) make loans to the Partnership (subject to Section 4.2B.). In no event shall the Limited Partners be required to make any additional Capital Contributions or any loan to, or otherwise provide any financial accommodation for the benefit of, the Partnership pursuant to any such permitted action by the General Partner, except insofar as a Limited Partner has exercised its New Equity Financing Right pursuant to Section 8.8.

B.Except as agreed otherwise at the time by vote or written consent of the L.P. Unit Majority: (i) the Company shall lend to the Partnership its Pro Rata Share of the proceeds of or consideration received by the Company from all loans and advances to the Company pursuant to any financial borrowing arrangement on the same financial terms and conditions, including interest rate and repayment schedule, as shall be applicable with respect to or incurred in connection with the issuance of such loans and advances to the Company (which the Partnership may, in turn, lend to any other partnership constituting part of the Operating Partnership); (ii) in the case of Equity Securities senior or junior to the Common Stock as to dividends and distributions on liquidation, which are not convertible into Common Stock as of the issuance date, the Company shall contribute to the Partnership the proceeds of or consideration (including any property or other non-cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and shall receive from the Partnership, new Partnership Interests in the Partnership in consideration therefor with the same financial terms and conditions, including dividend, dividend priority, liquidation preference, conversion and redemption rights, as are applicable to such Equity Securities; (iii) in the case of Common Stock, or other Equity Securities convertible into Common Stock as of the issuance date, including, without limitation, shares of Common Stock or other Equity Securities issued upon exercise of options issued under the Stock Option Plan or any other Employee Benefit Plan of the Company, the Company shall contribute to the Partnership the proceeds of or consideration (including any property or other non-

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cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and shall receive from the Partnership a number of additional Units of General Partner Interest in consideration therefor equal to the product of (x) the number of shares of Common Stock or other Equity Securities issued by the Company, multiplied by (y) the Exchange Factor in effect on the date of such contribution; and (iv) in the case of Common Stock or other Equity Securities issued upon the exercise or surrender of rights under a stock option, warrant, or any other right for which the Company does not receive proceeds, and issues less than the number of shares of Common Stock or other Equity Securities subject to such option, warrant or other right to the holder thereof retaining the excess of such shares as payment of the purchase price (a “net exercise”), or where the Company uses the proceeds received pursuant to a Dividend Reinvestment Plan to acquire shares of Common Stock or other Equity Securities to be issued to the shareholder exercising such right, the Company shall receive from the Partnership a number of additional Units of General Partner Interest equal to the actual number of shares of Common Stock or other Equity Securities so issued to the shareholder multiplied by the Exchange Factor.

4.3ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS; ADMISSION OF ADDITIONAL LIMITED PARTNERS.  In addition to any Partnership Interests issuable by the Partnership pursuant to Section 4.2, and subject to the provisions of Sections 8.8 and 8.9, the General Partner is authorized to cause the Partnership to issue additional Partnership Interests (or options therefor) in the form of L.P. Units or other Partnership Interests senior or junior to the L.P. Units to any Persons at any time or from time to time, for consideration per Unit of Partnership Interest not less than the Common Stock Price determined at the initial issuance date divided by the Exchange Factor, and on such other terms and conditions, as the General Partner shall establish provided, however, that (i) each partnership included in the Operating Partnership shall effect its Pro Rata Share of such issuance, (ii) such issuance does not cause the Partnership to become, with respect to any Employee Benefit Plan subject to Title I of ERISA or Section 4975 of the Code, a “party in interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(e) of the Code); and (iii) such issuance does not cause any portion of the assets of the Partnership to constitute assets of any Employee Benefit Plan subject to Section 2510.3-101 of the regulations of the United States Department of Labor. Subject to the limitations set forth in the preceding sentence, the General Partner may take such steps as it, in its reasonable discretion, deems necessary or appropriate to admit any Person as a Limited Partner of the Partnership, including, without limitation, amending the Certificate, Appendix II or any other provision of this Agreement.

4.4REPURCHASE OF COMPANY EQUITY SECURITIES.  In the event the Company shall elect to purchase from its shareholders shares of Common Stock for the purpose of delivering such shares to satisfy an obligation under any Dividend Reinvestment Plan or Employee Benefit Plan adopted by the Company, or shall repurchase any other Equity Securities of the Company pursuant to any other share repurchase obligation or arrangement undertaken by the Company with any Company shareholder, including preferred stock redemptions, the purchase price paid by the Company for such shares and any other expenses incurred by the Company in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the Company, subject to the condition that: (i) if such shares subsequently are to be sold by the Company, the Company shall pay to the Partnership any proceeds received by the Company for such shares of Common Stock or other Equity Securities (provided that an exchange of shares of Common Stock for L.P. Units pursuant to the Exchange Rights Agreement would not be considered a sale for such purposes); and (ii) if such shares are not re-transferred by the Company within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel the number of Units of

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General Partner Interest held by the Company determined by multiplying (x) the quotient obtained by dividing the total amount deemed paid by the Partnership by the Common Stock Price determined as of the repurchase date, by (y) the Exchange Factor in effect on the date of such repurchase.

4.5NO THIRD PARTY BENEFICIARY.  No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns.

4.6NO INTEREST; NO RETURN.  No Partner shall be entitled to interest on its Capital Contribution or on such Partner’s Capital Account. Except as provided in Section 8.7 or Article 13 of this Agreement, or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution from the Partnership.

ARTICLE 5.DISTRIBUTIONS.

5.1REGULAR DISTRIBUTIONS.  Except for distributions pursuant to Section 13.2 in connection with the dissolution and liquidation of the Partnership, and subject to the provisions of Sections 5.3, 5.4 and 5.5, the General Partner shall cause the Partnership to distribute, from time to time as determined by the General Partner, but in any event not less frequently than once each Quarter, the Partnership’s Pro Rata Share of all Available Cash, to the Partners, in accordance with each Partner’s respective Percentage Interest; provided, however, that in no event may a Limited Partner receive a distribution of Available Cash with respect to a L.P. Unit, if such Limited Partner is entitled to receive a distribution out of such Available Cash with respect to a share of Common Stock for which such L.P. Unit has been exchanged.

5.2QUALIFICATION AS A REIT.  The General Partner shall be entitled to cause the Partnership to distribute to the General Partner the Partnership’s Pro Rata Share of Available Cash distributed by the Operating Partnership to enable the General Partner to pay shareholder dividends that will (i) satisfy the REIT Requirements for distributions to shareholders, and (ii) avoid any federal income or excise tax liability of the General Partner; provided, however, the General Partner is not bound to comply with this covenant to the extent such distributions would violate applicable Delaware law.

5.3WITHHOLDING.  With respect to any withholding tax or other similar tax liability or obligation to which the Partnership may be subject as a result of any act or status of any Partner or to which the Partnership becomes subject with respect to any Unit, the Partnership shall have the right to withhold amounts of Available Cash distributable to such Partner or with respect to such Units, to the extent of the amount of such withholding tax or other similar tax liability or obligation pursuant to the provisions contained in Section 10.5.

5.4ADDITIONAL PARTNERSHIP INTERESTS.  If the Partnership issues Partnership Interests in accordance with Section 4.2 or 4.3 which are entitled to certain distribution priorities, Section 5.1 shall be amended, as necessary, to reflect the distribution priority of such Partnership Interests and corresponding amendments shall be made to the provisions of Appendix III.

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5.5DISTRIBUTIONS UPON LIQUIDATION.  Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2.

ARTICLE 6.ALLOCATIONS.

The Net Income, Net Loss, and other Partnership items of income, gain, loss, deduction or credit as provided under the Code, shall be allocated pursuant to the provisions of Appendix III, as amended from time to time.

ARTICLE 7.MANAGEMENT AND OPERATION OF BUSINESS.

7.1MANAGEMENT.

A.Except as otherwise expressly provided in this Agreement, and subject to the provisions of Section 8.9, all management powers over the business and affairs the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners, with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under the Act or which are granted to the General Partner under any other provision of this Agreement, the General Partner shall have full power and authority to make contracts, sign documents, conduct litigation, acquire and convey property, hire employees, consultants and professionals, raise capital, borrow funds, incur liabilities, invest funds, comply with all applicable laws, and do all other things deemed necessary or desirable by the General Partner to conduct the business of the Partnership on behalf of the Partnership; to exercise all powers set forth in Section 3.2, and to effectuate the purposes set forth in Section 3.1, provided that any exercise of the foregoing rights and powers must be consistent with the REIT Requirements.

B.Except as provided in Section 8.9, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.

C.At all times from and after the date hereof, in accordance with the provisions of the Acquisition Agreement, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amount as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. Such accounts may include funds of the General Partner and the other partnerships in the Operating Partnership, which the General Partner shall be free to commingle.

D.In exercising its authority under this Agreement, the General Partner shall take into account the tax consequences to any Partner of any action taken by it and shall select the alternative which appears at the time to present the least adverse tax consequences to the Limited

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Partners. By way of example, but not of limitation: If the General Partner decides to refinance (directly or indirectly) any outstanding indebtedness of the Partnership, the General Partner shall use reasonable efforts to structure such refinancing in a manner that minimizes any adverse tax consequences resulting therefrom to the Limited Partners. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of a necessary action (or inaction) by the General Partner taken pursuant to its authority under and in accordance with this Agreement where avoiding the resulting adverse tax consequences to a Limited Partner was not reasonably practicable under the circumstances.

7.2CERTIFICATE OF LIMITED PARTNERSHIP.  The General Partner shall file the amended Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5A(iv) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner.

7.3REIMBURSEMENT OF THE GENERAL PARTNER AND THE COMPANY.

A.Except as provided in this Section 7.3 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.

B.The General Partner, shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all expenses that it incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided, that the amount of any such reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it in its name. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.6.

7.4OUTSIDE ACTIVITIES OF THE GENERAL PARTNER.  The General Partner shall not directly or indirectly enter into or conduct any business other than in connection with the ownership, acquisition, development and disposition of Partnership Interests and the management of the business of the Partnership, and such activities as are incidental thereto. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests.

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7.5CONTRACTS WITH AFFILIATES.

A.The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.

B.Except as provided in Section 7.4, the Partnership may Transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable.

C.Except as expressly permitted by this Agreement or otherwise contemplated by the Acquisition Agreement, neither the General Partner nor any of its Affiliates shall sell, Transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable.

D.Except as provided otherwise in Section 8.9, the General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, Employee Benefit Plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any Subsidiaries of the Partnership.

E.The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a “right of first opportunity” or “right of first offer” arrangement, non-competition agreements and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable.

7.6INDEMNIFICATION.

A.To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, reasonable attorneys’ fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the Company as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, except to the extent it is finally determined by a court of competent jurisdiction, from which no further appeal may be taken, that such Indemnitee’s action constituted intentional acts or omissions constituting willful misconduct or fraud. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), except with respect to Partnership debt that has been assumed or guaranteed by an Indemnitee in its capacity as a Limited Partner. The General Partner is hereby authorized and empowered, on behalf of the Partnership, to

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enter into one or more indemnity agreements consistent with the provisions of this Section 7.6 in favor of any Indemnitee having or potentially having liability for any such indebtedness. Any indemnification pursuant to this Section 7.6 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.6.

B.Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding.

C.The indemnification provided by this Section 7.6 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, under the Company’s Articles of Incorporation, as a matter of law, or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnities are indemnified.

D.The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnities and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

E.For purposes of this Section 7.6, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an Employee Benefit Plan whenever the performance by such Indemnitee of its duties to the Partnership also imposes duties on, or otherwise involves services by, such Indemnitee to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an Employee Benefit Pan pursuant to applicable law shall constitute fines within the meaning of this Section 7.6; and actions taken or omitted by the Indemnitee with respect to an Employee Benefit Plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participant and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.

F.In no event may an Indemnitee subject any of the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

G.An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

H.The provisions of this Section 7.6 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.6 or any provision hereof shall be prospective only and shall not in any way affect the Partnership’s liability to any Indemnitee under this Section 7.6, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole

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or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

I.The provisions of this Section 7.6 shall be inapplicable to any investigation, claim, suit, or proceeding, or the portion thereof, which concerns claims for breach of contract between the Partnership and a Person contracting other than in such Person’s capacity as a Partner, or as an officer or director of the General Partner.

J.No provision of this Section 7.6 shall be construed as permitting any contract or transaction which is prohibited by the provisions of Section 9.2(b) of the Acquisition Agreement.

7.7LIABILITY OF THE GENERAL PARTNER.

A.Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission, if the General Partner acted in good faith; provided, however, the foregoing shall not be deemed to exculpate the Company from any liability the Company may have under the Acquisition Agreement.

B.Subject to its obligations and duties as General Partner set forth in Section 7.1A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agent. The General Partner shall not be liable for any acts or omissions on the part of any such agent, except in circumstances for which the General Partner may be liable under Section 7.7A or would not be subject to indemnification under Section 7.6.

C.Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner’s and its officers’ and directors’ liability to the Partnership and the Limited Partners under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

7.8LIMITED PARTNERS’ RIGHT TO BRING DERIVATIVE LAWSUITS.  Any Limited Partner may bring an action on behalf of the Partnership, as permitted under the Act and the laws of the State of Delaware, to recover a judgment in favor of the Partnership if the General Partner has refused to bring the action or if an effort to cause the General Partner to bring the action is not likely to succeed.

7.9OTHER MATTERS CONCERNING THE GENERAL PARTNER.

A.The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.

B.The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and

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other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

C.The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder.

D.Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT; or (ii) to avoid the Company incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

7.10TITLE TO PARTNERSHIP ASSETS.  Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership asset for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held.

7.11RELIANCE BY THIRD PARTIES.  Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that: (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate,

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document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

ARTICLE 8.RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.

8.1LIMITATION OF LIABILITY.  The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Sections 10.5 and 13.3 hereof, or under the Act. Notwithstanding the preceding sentence, each Limited Partner shall have the right, but not the obligation, to guarantee a portion of the indebtedness of the Partnership in accordance with the terms of the Acquisition Agreement.

8.2MANAGEMENT OF BUSINESS.  No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

8.3OUTSIDE ACTIVITIES OF LIMITED PARTNERS.  Subject to any agreements entered into pursuant to Section 7.5 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its Subsidiaries including the Acquisition Agreement, any Limited Partner (other than the Company) and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner (other than the Company) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee which are permitted within the scope of this Section 8.3. None of the Limited Partners (other than the Company) nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person.

8.4RETURN OF CAPITAL.  Except in connection with the exercise of Exchange Rights or Put Rights, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Appendix III, or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions.

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8.5RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP.

A.In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner’ s own expense (including such reasonable copying and administrative charges as the General Partner may establish from time to time): (i) to obtain a copy of the most recent annual and quarterly reports filed by the Company with the SEC pursuant to the Exchange Act; (ii) to obtain a copy of the Partnership’s federal, state and local income tax returns for each Partnership Year; (iii) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (iv) to obtain a copy of this Agreement and the Certificate and all amendments and/or restatements thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments and/or restatements thereto have been executed; and (v) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner.

B.Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other confidential information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or the Company or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential.

8.6EXCHANGE RIGHTS.  The Limited Partners may exchange all or a portion of their L.P. Units for shares of Common Stock on the terms and subject to the conditions and restrictions contained in the Exchange Rights Agreement.

8.7PUT RIGHTS.

A.Upon the terms and subject to the conditions of this Agreement, each Limited Partner (other than Carl E. Berg and Clyde J. Berg with respect to all L.P. Units owned by them beneficially as of the Effective Date) shall have the right to tender to the Partnership outstanding L.P. Units no more than once during any 12-month period commencing after December 29, 1999. The Partnership shall purchase properly tendered L.P. Units for cash at a price (the “Tender Price”) equal to the average market value of the Common Stock price as of the date the Limited Partner delivers to the General Partner, at the address provided in Appendix II, a completed and duly executed Letter of Transmittal in the form attached as Exhibit A to the Exchange Rights Agreement, and any other documents required by the Letter of Transmittal. Only a tender in this manner will constitute a valid tender of L.P. Units pursuant to this Section 8.7A. The General Partner shall make all determinations as to the validity and form of any tender of L.P. Units in accordance with the provisions of this Agreement, and upon rejection of a tender, shall give the tendering holder written notice of such rejection, which shall include the reasons therefor. Unless otherwise agreed by the General Partner or as provided in Section 8.7C, tenders of L.P. Units pursuant to this Section 8.7A shall be irrevocable and shall not be subject to withdrawal or modification.

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B.Within 15 days after the valid tender of L.P. Units pursuant to Section 8.7A, the Company may make an election to purchase such L.P. Units itself with cash of the Company (the “Cash Election”). If with respect to any tender of L.P. Units pursuant to this Section 8.7, the Company makes the Cash Election, then within 90 days after such tender the Company shall pay to the tendering Limited Partner an aggregate amount of cash equal to the purchase price of the tendered L.P. Units with available cash, borrowed funds or the proceeds of an offering of new shares of Common Stock. Upon acquiring the L.P. Units, the Company may cause the Partnership to retire the L.P. Units and convert them to the same number of Units of General Partner Interest, and the General Partner shall amend Appendix II accordingly.

C.Notwithstanding the foregoing, if the purchase price for the L.P. Units tendered by a Limited Partners in one year exceeds $1,000,000, the Partnership or the Company shall be entitled to reduce proportionally the number of L.P. Units to be acquired from each Tendering Partner so that the total purchase price does not exceed $1,000,000 if the Company so elects. In addition, if the Company does not timely make the Cash Election, the Partnership shall deliver the purchase price for the tendered L.P. Units to the Limited Partner within 45 days after the Letter of Transmittal was delivered to the General Partner. The General Partner may defer payment of the purchase price until such time not to exceed 120 days after the valid tender of L.P. Units pursuant to Section 8.7A as the Partnership has adequate Available Cash after payment of the purchase price, in the reasonable judgment of the General Partner, to fund current distributions necessary for the Company to satisfy the REIT Requirements following the waiver by the Company of its right to make the Cash Election. In such event, the General Partner shall give the tendering Limited Partner written notice of its decision to defer the payment with a calculation supporting the General Partner’s determination within 20 days after the Letter of Transmittal was delivered to the General Partner. Upon receiving such notice, the Limited Partner may withdraw the tender. In addition, the Limited Partner may instead exercise its rights under the Exchange Rights Agreement. If a Limited Partner tenders L.P. Units pursuant to this Section 8.7, the Limited Partner shall pay the amount of any additional documentary, stamp or similar issue or transfer tax which is due, and shall be responsible for all income or other taxes as a result of such exchange.

D.Each tender of L.P. Units shall constitute a representation and warranty by the tendering Limited Partner of each of the representations and warranties set forth in the form of Letter of Transmittal.

E.Until the holder of L.P. Units tendered pursuant to Section 8.7 has received cash in exchange therefor, such Limited Partner shall continue to hold and own such L.P. Units for all purposes of this Agreement.

8.8NEW EQUITY FINANCING RIGHTS.

A.If the General Partner determines that it is in the best interests of the Partnership to obtain additional funds through the issuance of additional Partnership Interests, the General Partner shall first offer to the Limited Partners in each of the partnerships comprising the Operating Partnership, including the Partnership, the right of first refusal to purchase that portion of such additional Partnership Interests which their respective numbers of L.P. Units bear to the total number of outstanding L.P. Units in the Operating Partnership. The General Partner shall make this offer pursuant to a written notice describing the offering price, class or series of Partnership Interest, and all other material terms of the offer. Such notice shall be sent to each Limited Partner at the address reflected in Appendix II, as amended. The Limited Partners shall have 10 days from the date

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of such notice to elect to purchase any such additional Partnership Interests. Such election shall be made pursuant to a written subscription form specifying the number of Units of additional Limited Partnership Interests the Limited Partner intends to acquire and the total purchase price therefor, and shall be signed by the Limited Partner and delivered to the General Partner at the address set forth on Appendix II. After such 10-day period, the General Partner shall be free to offer any additional Limited Partnership Interests on substantially similar terms to non-Partners and Partners alike.

B.The foregoing right of the Limited Partners to acquire additional equity interests offered by the Partnership (“New Equity Financing Right”) shall not apply to any offering (i) which is part of a transaction in which the Limited Partners had the ability to exercise their New Equity Financing Rights under the Acquisition Agreement with respect to an offering of Equity Securities by the Company, (ii) in connection with a merger or other business combination subject to approval by the L.P. Unit Majority pursuant to Section 8.9, (iii) to a Person in connection with the acquisition of property or services by the Partnership from such Person, or (iv) of any Partnership Interest upon conversion of an outstanding Equity Security of the Partnership, any Partnership Subsidiary, or the Company.

8.9MATTERS REQUIRING L.P. UNIT MAJORITY APPROVAL.

The consent of the L.P. Unit Majority will be required with respect to the following actions involving the Partnership: (i) the material amendment, modification or termination of the Agreement; (ii) a general assignment for the benefit of creditors or the appointment of a custodian, receiver or trustee for any of the assets of the Partnership; (iii) the institution of any proceeding for bankruptcy of the Partnership; (iv) the Transfer of any General Partnership Interests, including transfers attendant to any merger, consolidation or liquidation of the Company except as otherwise provided in 11.2 C.; (v) the admission of any additional or substitute General Partner in the Partnership; and (vi) a Change of Control Transaction. In addition, until the Protective Provisions Expiration Date, the consent of the L.P. Unit Majority will also be required with respect to: (i) any Terminating Capital Transaction; (ii) the dissolution and liquidation of the Partnership; and (iii) the Partnership’s issuance of Limited Partner Interests having seniority over the L.P. Units with respect to distributing assets, and voting rights.

8.10[Reserved]

ARTICLE 9.BOOKS, RECORDS, ACCOUNTING AND REPORTS.

9.1RECORDS AND ACCOUNTING.

The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership’s business, including, without limitation, all books and records necessary to comply with applicable REIT Requirements and to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Sections 8.5A. and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax

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reporting purposes, on an accrual basis in accordance with GAAP, or such other basis as the General Partner determines to be necessary or appropriate.

9.2FISCAL YEAR.  The fiscal year of the Partnership shall be the calendar year.

ARTICLE 10.TAX MATTERS.

10.1PREPARATION OF TAX RETURNS.  The General Partner shall arrange for the preparation and timely filing of all Partnership returns for federal and state income tax purposes and shall use all reasonable efforts to furnish, within sixty (60) days of the close of each taxable year, the tax information reasonably required by Limited Partners for their federal and state income tax reporting purposes.

10.2TAX ELECTIONS.  The General Partner shall elect for the Partnership to be considered a limited partnership on all applicable federal and state income tax returns to be filed by the Partnership. Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any other available election pursuant to the Code. Notwithstanding the above, in making any such tax election the General Partner shall take into account the tax consequences to the Limited Partners resulting from any such election. The General Partner shall make such tax elections on behalf of the Partnership as the L.P. Unit Majority request, provided that the General Partner believes that such election is not adverse to the interests of the General Partner, including its interest in preserving its qualification as a REIT under the Code. In addition, the General Partner shall elect the “traditional method” of making Section 704(c) allocations pursuant to Regulations Section 1.704-3 with respect to each Property under the Acquisition Agreement. The General Partner shall have the right to seek to revoke any tax election it makes (other than the election to use the traditional method of making the Section 704(c) allocations described in this Section 10.2), including, without limitation, the election under Section 754 of the Code, upon the General Partner’ s determination, in its sole and absolute discretion, that such revocation is in the best interests of the Limited Partners taken as a whole and with the approval of the L.P. Unit Majority until the Protective Provisions Expiration Date. All such elections and determinations may be made on a Property-by-Property basis, and the General Partner shall be required to analyze the impact of all such elections and determinations on that basis.

10.3TAX MATTERS PARTNER.

A.The General Partner shall be the “tax matters partner” of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the Internal Revenue Service of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the Internal Revenue Service with the name, address, taxpayer identification number, and Percentage Interest of each of the Limited Partners and the Assignees; provided, that such information is provided to the Partnership by the Limited Partners and the Assignees.

B.The tax matters partner is authorized, but not required:

(1)to enter into any settlement with the Internal Revenue Service with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial proceedings being referred to as “judicial review”), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the Internal Revenue Service providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a “notice partner” (as defined in Section 6231(a)(8) of the Code) or a member of a “notice group” (as defined in Section 6223(b)(2) of the Code);

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(2)in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a “final adjustment”) is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership’s principal place of business is located;

(3)to intervene in any action brought by any other Partner for judicial review of a final adjustment;

(4)to file a request for an administrative adjustment with the Internal Revenue Service and, if any part of such request is not allowed by the Internal Revenue Service, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request;

(5)to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.

The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.6 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such.

C.The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable.

10.4ORGANIZATIONAL EXPENSES.  The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code.

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10.5WITHHOLDING.  Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within 15 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the amount of Available Cash which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner’ s Partnership Interest to secure such Limited Partner’s obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay when due any amounts owed to the Partnership pursuant to this Section 10.5, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event, the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amount payable by a Limited Partner hereunder shall bear interest at the highest base or prime rate of interest published from time to time by any of Wells Fargo Bank, N.A., plus 4 percentage points, but in no event higher than the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder.

ARTICLE 11.TRANSFERS AND WITHDRAWALS.

11.1TRANSFER.

A.The term “Transfer,” when used in this Article 11 with respect to a Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person. The term “Transfer” when used in this Article 11 does not include any exchange of L.P. Units for shares of Common Stock pursuant to the Exchange Rights Agreement.

B.No Partnership Interest shall be Transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any Transfer or purported Transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void.

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11.2TRANSFER OF THE COMPANY’S PARTNERSHIP INTERESTS.

A.The General Partner may not withdraw as General Partner or transfer its General Partner Interest or Limited Partner Interest unless (i) the L.P. Unit Majority (excluding L.P. Units held by the Company) consents to such Transfer or withdrawal, or (ii) such Transfer is to an entity which is wholly-owned by the Company and is a Qualified REIT Subsidiary under Section 856(i) of the Code.

B.In the event the General Partner withdraws as General Partner in accordance with Section 11.2A, the General Partner’s General Partner Interest shall immediately be converted into a Limited Partner Interest.

11.3LIMITED PARTNERS’ RIGHTS TO TRANSFER.

A.Subject to the provisions of this Section 11.3, a Limited Partner (other than the Company) may, without the consent of the General Partner:

(a)if such Limited Partner is a partnership or a limited liability company, Transfer such Limited Partner’s L.P. Units to any partner of such Limited Partner or any member of such limited liability company;

(b)Transfer such Limited Partner’s L.P. Units to any other Limited Partner; and

(c)pledge such Limited Partner’s L.P. Units to any financial institution as collateral for any loan with respect to which such Limited Partner is personally liable.

B.Subject to the provisions of this Section 11.3, a Limited Partner may Transfer any of such Limited Partner’s L.P. Units, other than in accordance with Section 11.3A, only with the prior written consent of the General Partner which may be withheld in its sole discretion.

C.If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner’s estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to Transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.

D.No Transfer by a Limited Partner of its L.P. Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation; (ii) such Transfer would cause the Partnership to become, with respect to any Employee Benefit Plan subject to Title I of ERISA, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(c) of the Code); (iii) such Transfer would, in the opinion of legal counsel for the Partnership, cause any portion of the assets of the Partnership to constitute assets of any Employee Benefit Plan pursuant to Department of Labor Regulations Section 2510.2-101; (iv) such Transfer would subject the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or ERISA; or (v) such Transfer is a sale or exchange, and such sale or exchange would, when aggregated with all other sales and exchanges during the 12-month period ending on the date of the proposed Transfer, result in a Change of Control Transaction.

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E.Subject to the foregoing provisions of Section 11.3 and the terms of Section 12.2, a Limited Partner may transfer L.P. Units to an Affiliate and have such Affiliate become a Limited Partner.

In addition to the conditions set forth in Sections 11.3D, 11.4, and 12.2 any Transfer pursuant to this Article 11 is subject to the following conditions:

(1)unless such Transfer is being made pursuant to an effective registration statement under the Securities Act, or pursuant to Rule 144 or Rule 144A thereunder, the transferring Limited Partner shall deliver to the Company a notice with respect to the proposed transfer, together with an opinion of counsel in form and substance satisfactory to the General Partner prepared by counsel reasonably satisfactory to the General Partner (which shall include, without limitation, counsel to each of the Limited Partners as of the date hereof), to the effect that an exemption from registration and qualification under such Securities Act is available;

(2)the transferring Limited Partner and its transferee shall each provide a certificate to the General Partner, in form and substance satisfactory to the General Partner, to the effect that (i) the proposed transfer will not be effected on or through (a) a United States national, regional or local securities exchange, (b) a foreign securities exchange or (c) an interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers (including, without limitation, the Nasdaq) by electronic means or otherwise, and (ii) it is not, and the proposed transfer will not be made by, through or on behalf of, (a) a Person who regularly quotes equity interests in the Partnership, such as a broker or dealer making a market in equity interests in the Partnership or (b) a Person who regularly makes available to the public (including customers or subscribers) bid or offer quotes with respect to equity interests in the Partnership and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others; PROVIDED, HOWEVER, that such certificate shall not be required for any transfer in connection with a registered public offering;

(3)the transferee must be a United States Person for federal income tax purposes; and

(4)such transfer must not cause the Partnership to terminate or lose its status as a partnership for tax purposes.

F.If it shall become unlawful for any Limited Partner to continue to hold some or all of the L.P. Units held by such Limited Partner, or by reason of legal or regulatory restrictions the cost to such Limited Partner to continue to hold such L.P. Units (in relation to the value of such L.P. Units to such Limited Partner) has, in the reasonable judgment of such Limited Partner, significantly increased, such Limited Partner may, at any time following the date three business days after the delivery by such Limited Partner to the General Partner a notice of the existence of any such restriction, Transfer all or any portion of the L.P. Units held by such Limited Partner free of any restrictions imposed under this Agreement (other than those restrictions required by federal or state laws, including securities, and tax, laws, and subject to the prospective transferee meeting the requirements of Section 12.2, and provided that the transferee Limited Partner shall hold its L.P. Units subject to all of the terms of this Agreement); but only if such Limited Partner cannot then

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exercise its Exchange Rights or Put Rights for cash, and the Company has notified the Limited Partner that the Company will not register for offer and sale all shares of Common Stock issued upon the exercise of the Exchange Rights within 90 days. In connection therewith, the Company shall assist such Limited Partner in disposing of the L.P. Units held by it in a prompt and orderly manner, and (at the request of such Limited Partner) make available (and authorize such Limited Partner to make available through the Company) financial and other information concerning the Company and its Subsidiaries (including, without limitation, the information described in Rule 144A(d)(4)) to any prospective purchaser of such L.P. Units (it being agreed that such prospective purchaser shall be either an “accredited investor” within the meaning of Rule 501 (a) under the Securities Act or a “qualified institutional buyer” within the meaning of Rule 144A(d)(1) under such Act to the extent that such L.P. Units are “restricted securities” as such term is defined in Rule 144). The Company may require that each such prospective purchaser keep confidential, pursuant to customary confidentiality requirements, any information received by it pursuant to this provision.

11.4SUBSTITUTED LIMITED PARTNERS.  The General Partner shall have the right to consent to the admission of a transferee who receives L.P. Units pursuant to Section 11.3A, C, or E, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner’s failure or refusal to permit such transferee to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner.

11.5ASSIGNEES.  If the General Partner, in its sole and absolute discretion, does not consent to the admission of any transferee as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses and any other Tax Items with respect to the L.P. Units assigned to such transferee, but shall not be deemed to be a holder of L.P. Units for any other purpose under this Agreement, and shall not be entitled to vote such L.P. Units in any matter presented to the Limited Partners for a vote (such L.P. Units being deemed to have been voted on such matter in the same proportion as all other L.P. Units held by Limited Partners are voted). In the event the Assignee desires to make a further assignment of any such L.P. Units, such Assignee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of L.P. Units.

11.6EFFECT OF PROHIBITED TRANSFER.  Any transfer made in violation of Article 11 shall be null and void and of no force and effect.

11.7GENERAL PROVISIONS.

A.No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of such Limited Partner’ s L.P. Units in accordance with this Article 11, or pursuant to the tender or exchange of all of its L.P. Units pursuant to the exercise of Put Rights or Exchange Rights.

B.Any Limited Partner who shall Transfer all of its L.P. Units in a Transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such L.P. Units as Substituted Limited Partners. Similarly, any Limited Partner who shall Transfer all of its L.P. Units pursuant to a tender or exchange of all of its L.P. Units pursuant to the exercise of Put Rights or Exchange Rights shall cease to be a Limited Partner.

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C.Without the consent of the General Partner, permitted Transfers pursuant to this Article 11 may be made effective only as of the first day of a Quarter.

D.If any Partnership Interest is transferred or assigned during the year in compliance with the provisions of this Article 11, or redeemed pursuant to Section 8.7, or exchanged pursuant to the Exchange Rights Agreement on any day other than the first day of a Partnership Year, the Net Income, Net Losses, each item thereof, and all other Tax Items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the Transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which an exchange occurs shall be allocated to the exchanging Partner, provided, however, that the General Partner may adopt such other conventions relating to allocations in connection with transfers, assignments, or exchanges as it determines are necessary or appropriate. All distributions of Available Cash attributable to such L.P. Units with respect to which the Partnership Record Date is before the date of such transfer, assignment, or exchange shall be made to the transferor Partner or the exchanging Partner, as the case may be, and in the case of a Transfer or assignment other than an exchange, all distributions of Available Cash thereafter attributable to such L.P. Units shall be made to the transferee Partner.

ARTICLE 12.ADMISSION OF PARTNERS.

12.1ADMISSION OF SUCCESSOR GENERAL PARTNER.  A successor to all of the General Partner Interest pursuant to Article 11 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon the Transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement, the Acquisition Agreement, and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6D.

12.2ADMISSION OF ADDITIONAL AND SUBSTITUTED LIMITED PARTNERS.

A.A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement after the Effective Date and a Permitted Transferee pursuant to Article 11 shall be admitted to the Partnership as an Additional Limited Partner or a Substituted Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement and the Acquisition Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner.

B.Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner or a Substituted Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner’s sole and absolute discretion. The admission of any Person as an Additional Limited Partner or a Substituted

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Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission.

C.If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each other Tax Item and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner.

D.A transferee who has been admitted as a Substituted Limited Partner or an Additional Limited Partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement.

12.3AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP.  For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Appendix II) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof.

ARTICLE 13.DISSOLUTION, LIQUIDATION AND TERMINATION.

13.1DISSOLUTION.  The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. In the event of the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following (“Liquidating Events”):

(i)the expiration of its term as provided in Section 2.5 hereof;

(ii)an event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within 90 days after such event of withdrawal a majority in interest of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner;

(iii)from and after the date of this Agreement through December 31, 2048, an election to dissolve the Partnership made by the General Partner, with the Consent of Limited Partners holding 66-2/3% or more of the L.P. Units (including L.P. Units held by the Company);

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(iv)on or after January 1, 2049, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion;

(v)entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act;

(vi)the sale of all or substantially all of the assets and properties of the Partnership;

(vii)a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner.

13.2WINDING UP.

A.Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by Limited Partners holding at least a majority of the Limited Partnership Interests (the General Partner or such other Person being referred to herein as the “Liquidator”), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of beneficial interest or other securities of the Company) shall be applied and distributed in the following order:

(i)First, to the payment and discharge of all of the Partnership’s debts and liabilities to creditors other than the Partners;

(ii)Second, to the payment and discharge of all of the Partnership’s debts and liabilities to the General Partner;

(iii)Third, to the payment and discharge of all of the Partnership’s debts and liabilities to the other Partners;

(iv)Fourth, to the General Partner and Limited Partners to the extent of and in accordance with the positive balances in their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods; and

(v)The balance, if any, to the Partners according to their Percentage Interests.

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The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13.

B.Notwithstanding the provisions of Section 13.2A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any asset except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interests of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

C.In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be:

(1)distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or

(2)withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2A as soon as practicable.

13.3OBLIGATION TO CONTRIBUTE DEFICIT.  In the event the Partnership is “liquidated” within the meaning Section 1.704-1(b)(2)(ii)(G) of the Regulations, if any Partner’s Adjusted Capital Accounts are less than zero (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such Partner’s Capital Account to zero in compliance with Regulations Section 1.704-1(b)(2(ii)(B)(3).

13.4RIGHTS OF LIMITED PARTNERS.  Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Adjusted Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner

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shall have priority over any other Partner as to the return of its Adjusted Capital Contributions, distributions, or allocations.

13.5NOTICE OF DISSOLUTION.  In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners.

13.6TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP.  Upon the completion of the liquidation of the Partnership’s assets, as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the state of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.

13.7REASONABLE TIME FOR WINDING-UP.  A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation.

13.8WAIVER OF PARTITION.  Each Partner hereby waives any right to partition of the Partnership property.

13.9DEEMED DISTRIBUTION AND RECONTRIBUTION.  Notwithstanding any other provisions of this Article 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(G) but no Liquidating Event has occurred, the Property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged, and the Partnership’s affairs shall not be wound up. Instead, the Partnership shall be deemed to have distributed the Property in kind to the Partners, who shall be deemed to have assumed and taken subject to all Partnership liabilities, all in accordance with their respective Capital Accounts, and if any Partner has an Adjusted Capital Account Deficit (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs) such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2(ii)(B)(3). Immediately thereafter, the Partners shall be deemed to have recontributed the property in kind to the Partnership, which shall be deemed to have assumed and taken subject to all such liabilities.

ARTICLE 14.AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS.

14.1AMENDMENTS.

A.Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the Company) holding in the aggregate 25% or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than 15 days, and failure to

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respond in such time period shall constitute a vote which is consistent with the General Partner’s recommendation with respect to the proposal. Except as provided in Section 8.9, 13.1C., 14.1B., 14.1C. or 14.1D., a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Limited Partners holding 50% or more of the Percentage Interests of the Limited Partners (including Limited Partner Interests held by the Company).

B.Notwithstanding any provisions of Sections 8.9 and 14.1A. to the contrary, the General Partner shall have the power, without the consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes:

(1)to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners;

(2)to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement;

(3)to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.3 hereof;

(4)to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and

(5)to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law.

The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1B is taken.

C.Notwithstanding provision of Section 14.1A. and 14.1B. to the contrary, this Agreement shall not be amended without the Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner’s interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Article IV and Section 14.1B.(3) hereof); (iv) cause the termination of the Partnership prior to the time set forth in Section 2.5 or 13.1; or (v) amend this Section 14.1C. Further, no amendment may alter the restrictions on the General Partner’ s authority set forth in Section 13.1C. without the Consent specified in that section.

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14.2MEETINGS OF THE PARTNERS.

A.Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the Company) holding 25% or more of the Partnership Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than 7 days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Limited Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of the Partners or may be given in accordance with the procedure prescribed in Section 14.1A. hereof. Except as otherwise expressly provided in this Agreement, the consent of holders of a majority of the Percentage Interests held by Partners (including Limited Partnership Interests held by the Company) shall control.

B.Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

C.Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership’s receipt of written notice of such revocation from the Limited Partner executing such proxy.

D.Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Meetings of Partners may be conducted in the same manner as meetings of the shareholders of the Company and may be held at the same time, and as part of, meetings of the shareholders of the Company.

ARTICLE 15.GENERAL PROVISIONS.

15.1ADDRESSES AND NOTICE.  Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee (including electronic mail and electronic facsimile transmission if delivery in that manner has been confirmed) at the address set forth in Appendix II or such other address of which the Partner shall notify the General Partner in writing.

15.2TITLES AND CAPTIONS.  All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define,

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limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.

15.3PRONOUNS AND PLURALS.  Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

15.4FURTHER ACTION.  The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

15.5BINDING EFFECT.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

15.6CREDITORS.  Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.

15.7WAIVER.  No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

15.8COUNTERPARTS.  This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.

15.9APPLICABLE LAW.  This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof.

15.10INVALIDITY OF PROVISIONS.  If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

15.11ENTIRE AGREEMENT.  This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto.

15.12GUARANTY BY THE COMPANY. The Company unconditionally and irrevocably guarantees to the Limited Partners the performance by the General Partner of the General Partner’ s obligations under this Agreement. This guarantee is exclusively for the benefit of the Limited Partners and shall not extend to the benefit any creditor of the Partnership.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

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GENERAL PARTNER:

MISSION WEST PROPERTIES, INC., A MARYLAND CORPORATION

By:  /s/ Raymond V. Marino                                                      

Its:   President & COO                                                      

LIMITED PARTNERS:

/s/ Carl E. Berg                                                     

CARL E. BERG

/s/ Clyde J. Berg                                                     

CLYDE J. BERG

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APPENDIX I

SCHEDULE OF CONTRIBUTED PROPERTIES

APN 086-36-043 consisting of approximately 148,600 square feet of improvements located in three buildings at the corner of Montague and Trade Zone, California

APNs 086-41-019, 020-022; 086-33-094, 095, 098, 099 more particularly described as Parcels 4, 5, 9, 10, 11, 12, and 13 of McCandless Technology Park, Milpitas, California

APPENDIX II

PARTNERS’ CONTRIBUTIONS AND PARTNERSHIP INTERESTS

Name and Percentage Address Interest of Partner	Agreed Value of Contributed Property Cash	Units	*Partnership Interest %
GENERAL PARTNER	$9,797,712
Mission West Properties, Inc. 10050 Bandley Drive Cupertino, CA 95014		2,411,330	16.32%
LIMITED PARTNERS
Carl E. Berg 10050 Bandley Drive Cupertino, CA 95014	$25,118,644	6,181,326	41.84%
Clyde J. Berg 10050 Bandley Drive Cupertino, CA 95014	$25,118,644	6,181,326	41.84%

 

*      Identical to Partnership Interest Percentage in Mission West Properties L.P. II

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APPENDIX III

ALLOCATIONS OF PARTNERSHIP INTERESTS

1.           ALLOCATION OF NET INCOME AND NET LOSS.

(a)           NET INCOME.  Except as otherwise provided in this Appendix III, Net Income (or items thereof) (other than Net Income, or items thereof, arising in connection with a Terminating Capital Transaction) for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests.

(b)           NET LOSS.  Except as otherwise provided in this Appendix III, Net Loss (or items thereof) of the Partnership for each fiscal year or other applicable period shall be allocated to the Partners in accordance with the Partners’ respective Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) allocated to a Partner under this subparagraph (b) would cause such Partner (hereinafter, a “Restricted Partner”) to have an Adjusted Capital Account Deficit, or increase the amount of an existing Adjusted Capital Account Deficit, as of the end of the fiscal year or other applicable period to which such Net Loss relates, such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the “Permitted Partners”) pro rata in accordance with each Permitted Partner’s Percentage Interest.

(c)           TERMINATING CAPITAL TRANSACTION; LIQUIDATION.  Allocations of Net Income or Net Loss (or items thereof) in connection with a Terminating Capital Transaction or Liquidation of the Partnership shall first be made so that, to the extent possible, each Partner’s Capital Account balance is equal to such Partner’s Adjusted Contribution, and the remainder of such Net Income or Net Loss (or items thereof) shall be allocated to the Partners in accordance with their Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) would be allocated to a Restricted Partner under this subparagraph (c), such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the Permitted Partners pro rata in accordance with each Permitted Partner’s Percentage Interest.

(d)           RULES OF CONSTRUCTION.

(1)           CAPITAL ACCOUNT INCREASES.  For purposes of making allocations pursuant to subparagraph 1(c) of this Appendix III, a Partner’s Capital Account balance shall be deemed to be increased by such Partner’s share of any Partnership Minimum Gain and Partner Minimum Gain remaining at the close of the fiscal period in respect of which such allocations are being made.

(2)           CHANGE IN PERCENTAGE INTERESTS.  In the event any Partner’s Percentage Interest changes during a fiscal year for any reason, including without limitation, the Transfer of any interest in the Partnership, the tax allocations contained in this Appendix III shall be applied as necessary to reflect the varying interests of the Partners during such year.

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2.           SPECIAL ALLOCATIONS.

Notwithstanding any provisions of paragraph 1 of this Appendix III, the following special allocations shall be made.

(a)           MINIMUM GAIN CHARGEBACK (NONRECOURSE LIABILITIES).  Except as otherwise provided in Section 1.704-2(f) of the Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partnership Minimum Gain to the extent required by Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Sections 1.704-2(f) and (j)(2) of the Regulations. This subparagraph 2(a) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(a) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto.

(b)           PARTNER MINIMUM GAIN CHARGEBACK.  Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704- 2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner’s share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This subparagraph 2(b) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(b) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto.

(c)           QUALIFIED INCOME OFFSET.  In the event a Partner unexpectedly receives any adjustments, allocations or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has an Adjusted Capital Account Deficit, items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible as required by the Regulations. This subparagraph 2(c) is intended to constitute a “qualified income offset” under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

(d)           OTHER CHARGEBACK OF IMPERMISSIBLE NEGATIVE CAPITAL ACCOUNT.  To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this paragraph 2(d) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Appendix III have been tentatively made as if this paragraph 2(d) were not in the Agreement.

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(e)           NONRECOURSE DEDUCTIONS.  Nonrecourse Deductions for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests.

(f)           PARTNER NONRECOURSE DEDUCTIONS.  Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Regulations).

(g)           INTENT OF ALLOCATIONS.  The parties intend that the allocation provisions of this Appendix III shall result in final Capital Account balances of the Partners that initially are equal to each Partner’s Adjusted Contribution and are then in proportion to the Partners’ respective Percentage Interests, so that when liquidating distributions are made in accordance with such final Capital Account balances under Section 13.2A(4) hereof, such distributions will be able to return to each Partner its Adjusted Contribution and then will be made in proportion to the Partners’ respective Percentage Interests. To the extent that such final Capital Account balances do not so reflect the provisions of this Appendix III, income and loss of the Partnership for the current year and future years, as computed for book purposes, shall be allocated among the Partners so as to result in final Capital Account balances reflecting the provisions of this Appendix III, and to the extent such allocations of items of income (including gross income) and deduction do not result in such final Capital Account balances, then, income and loss of the Partnership for prior open years, as computed for book purposes (or items of gross income and deduction of the Partnership for such years, as computed for book purposes) shall be reallocated among the Partners consistent with the foregoing. This subparagraph shall control notwithstanding any reallocation of income, loss, or items thereof, as computed for book purposes, by the Internal Revenue Service or any other taxing authority.

(h)           SECTION 754 ADJUSTMENT.  To the extent an adjustment to the adjusted tax basis of any asset of the Partnership pursuant to Section 734(b) of the Code or Section 743(b) of the Code is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated among the Partners in a manner consistent with the manner in which each of their respective Capital Accounts are required to be adjusted pursuant to such section of the Regulations.

(i)           GROSS INCOME ALLOCATION.  There shall be specially allocated to the General Partner an amount of Partnership income and gain during each Partnership Year or portion thereof, before any other allocations are made hereunder, which is equal to the excess, if any, of the cumulative distributions of cash made to the General Partner under Section 7.3B hereof over the cumulative allocations of Partnership income and gain to the General Partner pursuant to this Section (i) of this Appendix III.

3.           TAX ALLOCATIONS.

(a)           ITEMS OF INCOME OR LOSS.  Except as is otherwise provided in this Appendix III, an allocation of Partnership Net Income or Net Loss to a Partner shall be treated as an allocation to such Partner of the same share of each item of income, gain, loss, deduction and item of tax-exempt income or Section 705(a)(2)(B) expenditure (or item treated as such expenditure pursuant to

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Regulations Section 1.704-1(b)(2)(iv)(i)) (“Tax Items”) that is taken into account in computing Net Income or Net Loss.

(b)           SECTION 1245/1250 RECAPTURE.  If any portion of gain from the sale of Partnership assets is treated as gain which is ordinary income by virtue of the application of Code Sections 1245 or 1250 (“Affected Gain”), then such Affected Gain shall be allocated among the Partners in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated. This subparagraph 3(b) shall not alter the amount of Net Income (or items thereof) allocated among the Partners, but merely the character of such Net Income (or items thereof). For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income and Net Loss for such respective period.

(c)           PRECONTRIBUTION GAIN.  The Partnership may elect the traditional method of allocation contained in Section 1.704- 3(b) of the Regulations to take into account any variation between the adjusted basis and the fair market value of the Initial Contributed Property at the time of the contribution (“Precontribution Gain”) on a Property-by-Property basis. By executing this Agreement, each Partner hereby agrees to report income, gain, loss and deduction on such Partner’s federal income tax return in a manner that is consistent with the use of the traditional method of allocation with respect to the Initial Contributed Property. With respect to any Contributed Property, the Partnership shall use any permissible method contained in the Regulations promulgated under Section 704(c) of the Code selected by the General Partner, in its sole discretion, to take into account any variation between the adjusted basis of such asset and the fair market value of such asset as of the time of the contribution. Each Partner hereby agrees to report income, gain, loss and deduction on such Partner’s federal income tax return in a manner consistent with the method used by the Partnership.

(d)           ALLOCATIONS RESPECTING SECTION 704(C) AND REVALUATIONS.  If any asset has a Gross Asset Value which is different from the Partnership’s adjusted basis for such asset for federal income tax purposes because the Partnership has revalued such asset pursuant to Regulations Section 1.704-1(b)(2)(iv)(f), the allocations of Tax Items shall be made in accordance with the principles of Section 704(c) of the Code and the Regulations and the methods of allocation promulgated thereunder, provided, however, that the General Partner shall elect with respect to each Initial Contributed Property, to allocate the income, gain, loss and deduction with respect to such Property using the “traditional method” described in Regulations Section 1.704-3(b) unless the majority of the Limited Partners affected thereby otherwise instruct the General Partner. The intent of this Section 3(d) and Section 3(c) above is that each Partner who contributed to the capital of the Partnership a Contributed Property will bear, through reduced allocations of depreciation, increased allocations of gain or other items, the tax detriments associated with any Precontribution Gain. This Section 3(d) and Section 3(c) are to be interpreted consistently with such intent.

(e)           EXCESS NONRECOURSE LIABILITY SAFE HARBOR.  Pursuant to Regulations Section 1.752-3(a)(3), solely for purposes of determining each Partner’s proportionate share of the “excess nonrecourse liabilities” of the Partnership (as defined in Regulations Section 1.752-3(a)(3)), the Partners’ respective interests in Partnership profits shall be determined in accordance with each Partner’s Percentage Interest; provided, however, that each Partner who has contributed an asset to the Partnership shall be allocated, to the extent possible, a share of “excess nonrecourse liabilities” of the Partnership which results in such Partner being allocated nonrecourse liabilities in an amount which is at least equal to the amount of income pursuant to Section 704(c) of the Code and the

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Regulations promulgated thereunder (the “Liability Shortfall”). In the event there is an insufficient amount of nonrecourse liabilities to allocate to each Partner an amount of nonrecourse liabilities equal to the Liability Shortfall, then an amount of nonrecourse liabilities in proportion to, and to the extent of, the Liability Shortfall shall be allocated to each Partner.

(f)           REFERENCES TO REGULATIONS.  Any reference in this Appendix III or the Agreement to a provision of proposed and/or temporary Regulations shall, in the event such provision is modified or renumbered, be deemed to refer to the successor provision as so modified or renumbered, but only to the extent such successor provision applies to the Partnership under the effective date rules applicable to such successor provision.

(g)           SUCCESSOR PARTNERS.  For purposes of this Appendix III, a transferee of a Partnership Interest shall be deemed to have been allocated the Net Income, Net Loss and other items of Partnership income, gain, loss, deduction and credit allocable to the transferred Partnership Interest that previously have been allocated to the transferor Partner pursuant to this Agreement.

(h)           LIMITATION TO PRESERVE REIT STATUS.  Notwithstanding anything else in this Agreement, to the extent that the amount paid, credited, distributed or reimbursed by the Partnership or any Partners to, for or with respect any Partner that is a REIT (“REIT Partner”) or its officers, directors, employees or agents, whether as a reimbursement, fee, expense or indemnity (a “REIT Payment”), would constitute gross income to the REIT Partner for purposes of Section 856 (c)(2) or Section 856(c)(3) of the Code, then, notwithstanding any other provision of this Agreement, the amount of such REIT Payments, as selected by the General Partner in its discretion from among items of potential distribution, reimbursement, fees, expenses and indemnities, shall be reduced for any Fiscal Year so that the REIT Payments, as so reduced, to, for or with respect to such REIT Partner shall not exceed the lesser of:

(i)           an amount equal to the excess, if any, of (x) four and nine-tenths percent (4.9%) of the REIT Partner total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (H) of Section 856(c)(2) over (y) the amount of gross income (within the meaning of Section 856(c)(2)) derived by the REIT Partner from sources other than those described in subsections (A) through (H) of Section 856(c)(2) (but not including the amount of any REIT Payments); or

(ii) an amount equal to the excess, if any, of (x) 24% of the REIT Partner’s total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (I) of Section 856(c)(3) over (y) the amount of gross income (within the meaning of Section 856(c)(3)) derived by the REIT Partner from sources other than those described in subsections (A) through (I) of Section 856(c)(3) (but not including the amount of any REIT Payments);

PROVIDED, HOWEVER, that REIT payments in excess of the amounts set forth in clauses (i) and (ii) above may be made if the General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts shall not adversely affect the REIT Partner’s ability to qualify as a REIT. To the extent that REIT Payments may not be made in a Fiscal Year as a consequence of the limitations set forth in this Section 3(h), such REIT Payments shall carry over and shall be treated as arising in the following Fiscal Year. Nothing in this Section 3(h) shall permit the General Partner to allocate income of the Partnership to any Partner in excess of the income that would otherwise be allocated to it under Article 6 without regard to this Section 3(h). The purpose of

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the limitations contained in this Section 3(h) is to prevent any REIT Partner from failing to qualify as a REIT under the Code by reason of such REIT Partner’s share of items, including distributions, reimbursements, fees, expenses or indemnities, receivable directly or indirectly from the Partnership or the Partners, and this Section 3(h) shall be interpreted and applied to effectuate such purpose.

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EX-10.1.7

EXHIBIT 10.1.7

PARTNERSHIP DIVISION AGREEMENT

This Partnership Division Agreement (this “Agreement”) is entered into as of December 21, 2011, by and among Mission West Properties, L.P. I, a Delaware limited partnership (the “Partnership”), Mission West Properties, Inc., a Maryland corporation (the “Company”), and Mission West Properties, L.P. IV, a Delaware limited partnership (“MWP IV”).  Certain of the defined terms used in this Agreement are set forth in Section 6.

RECITALS

A.           The Company is the sole general partner of the Partnership.  The Partnership is governed by that certain Amended and Restated Agreement of Limited Partnership dated as of July 1, 1998 (the “Partnership Agreement”).  Unless otherwise defined in Section 6 of this Agreement, capitalized terms used in this Agreement have the meanings provided in the Partnership Agreement.

B.           The Partnership wishes to distribute certain Units of Partnership Interests pro rata to all of the existing Partners of the Partnership in proportion to the number of Units of Partnership Interest held by each Partner as of the date of this Agreement in a partnership division described in section 1.708-1(d)(3)(A) of the Regulations (the “Division”).

C.           The Division is to be effected through the formation of MWP IV by the Partnership; the creation of an Agreement of Limited Partnership of MWP IV containing terms substantially identical to those of the Partnership Agreement; the transfer of certain properties to MWP IV by the Partnership; and the distribution of Units of Partnership Interests to each of the Partners therein in proportion to their respective Partnership Interests in the Partnership followed by the redemption and cancellation of the number of Units of Partnership Interest of the Partnership equal to the number and percentages of Units in MWP IV distributed, which amount has been calculated by determining the same proportion to the total number of outstanding Units of Partnership Interest of the Partnership that the fair market value of the contributed properties bears to the total fair market value net of qualified non-recourse debt encumbering properties owned by the Partnership, determined as of the date of the distribution.

D.           The limited partners of the Partnership have approved the Division and related transactions described in this Agreement.

E.           Subject to and on the terms and conditions of this Agreement, on the Closing Date (as defined in Section 3.1) the Partnership shall contribute to MWP IV the real properties described in the attached Appendix I (collectively, the “Contributed Properties”) and shall distribute, transfer and assign to the Partners identified on Appendix I, in the percentages indicated thereon, in partial redemption and cancellation of the number of Units of Partnership Interest held by each such Partner as further set forth on Appendix I:

In this context, the Partnership, the Company and MWP IV agree as follows:

Section 1   Contribution of Real Properties and Other Assets

On the Closing Date, the Partnership shall contribute certain properties and assign certain contracts to MWP IV, and MWP IV agrees to accept such properties and assume such contracts as follows:

1.1Contributed Properties.  All of the Partnership’s right, title and interest in and to each of the real properties described in the Contributed Properties in the attached Appendix I, together with (a) any and all buildings, structures, systems, facilities, fixtures, fences and parking areas located on the Contributed Properties and any and all machinery, equipment, apparatus and appliances (not owned by tenants) used in connection with the operation or occupancy of the Contributed Properties and any leasehold interest in all such improvements leased by the Partnership, (b) all privileges, rights, easements and appurtenances belonging to the Contributed Properties, (c) all development rights, air rights, water and sewer capacity rights and water stock relating to the Contributed Properties, and (d) all right, title and interest of the Partnership in and to any streets, alleys, passages, common areas, other easements and other rights-of-way or appurtenances included in, adjacent to or used in connection with the Contributed Properties (collectively, the “Improvements”);

1.2Personal Property.  All of the Partnership’s right, title and interest in and to any personal property located within or used in connection with the Contributed Properties;

1.3Leases.  All of the Partnership’s right, title and interest in and to the leases, licenses and other occupancy agreements with tenants relating to the use or occupancy of any portion of any of the Contributed Properties, including any amendments to the foregoing (collectively, the “Leases”);

1.4Service Contracts.  All of the Partnership’s right, title and interest in and to the contracts (other than the Leases) entered into by the Partnership or its property manager or leasing agent relating to the management, maintenance, leasing or operation of any of the Contributed Properties, if any;

1.5Other Assets.  If any, all of the Partnership’s right, title and interest in and to all tangible and intangible assets of any nature relating exclusively to the Contributed Properties or the Personal Property, including without limitation (a) all warranties upon the Improvements or Personal Property, to the full extent such warranties are assignable, (b) copies of all plans, specifications, engineering drawings and prints relating to the construction of the Improvements, (c) all copyrights, logos, designs, trademarks, trade names, service marks, phone numbers and all goodwill associated with the Contributed Properties, (d) all other intellectual or intangible property used by the Partnership in connection with the Contributed Properties, (e) all rental deposits, security deposits, pet deposits, cleaning deposits and other deposits given by tenants to secure their performance under the Leases; and (f) all claims and causes of action arising out of or in connection with the Contributed Properties (other than claims for delinquent rents and other tenant obligations which the Partnership may retain pursuant to Section 3.6(a)); and

1.6Excluded Assets.  MWP IV shall not be entitled to receive, and the Partnership shall retain, all other real properties held by the Partnership (the “Retained Properties”), the

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leases, licenses and other occupancy agreements with tenants relating to the use or occupancy of any portion of any of the Retained Properties, including any amendments to the foregoing (collectively, the “Retained Leases”), all service contracts other than the Service Contracts and the Terminated Contracts, any and all assets of the type described in Section 1.5 that relate to the Retained Properties and the Retained Leases.

Section 2   Allocation of Obligations

2.1Leases and Service Contracts.  On the Closing Date, MWP IV shall assume the Partnership’s obligations under the Leases and the Service Contracts (other than the Terminated Contracts).

2.2Indemnification.

(a)MWP IV shall indemnify and hold harmless the Partnership, its partners, and their respective partners, directors, officers, employees and agents (collectively, the “Partnership Indemnified Parties”) from and against any claim, loss, damage, liability or expenses, including, without limitation, reasonable attorneys’ fees and court costs, incurred by the Partnership Indemnified Parties after the Closing Date with respect to the Contributed Properties, the Leases, and the Service Contracts.

(b)The Partnership shall indemnify and hold harmless MWP IV, its shareholders, officers, directors and employees, and their respective partners, directors, officers, employees and agents (collectively, the “MWP IV Indemnified Parties”) from and against any claim, loss, damage, liability or expenses, including, without limitation, reasonable attorneys’ fees and court costs, incurred by the MWP IV Indemnified Parties after the Closing Date with respect to the Retained Properties, the Retained Leases, and any contracts of the Partnership other than the Service Contracts.

Section 3   Closing

3.1Closing Date.  The parties shall close the transaction contemplated by this Agreement (the “Closing”) on December 31, 2011, or such other date as is mutually agreed between the Partnership and the Company (the “Closing Date”).

3.2Escrow.  This Section 3, together with such additional instructions as First American Title Insurance Company, San Jose, California, Attention: Liz Zankich (“Escrow Holder”) shall reasonably request and the parties shall agree to, shall constitute the escrow instructions to Escrow Holder.  If there is any inconsistency between this Agreement and the Escrow Holder’s additional instructions, this Agreement shall control unless the intent to amend this Agreement is clearly stated in such additional instructions.

3.3The Partnership’s Closing Deliverables.  The Partnership shall deliver to MWP IV on or before the Closing (or, in the case of the items referred to in Sections 3.3(a), deliver to the Escrow Holder prior to the Closing Date) the following:

(a)Duly executed and acknowledged grant deeds (the “Deeds”), conveying each of the Contributed Properties to MWP IV;

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(b)Two signed counterparts of an assignment and assumption agreement, in which the Partnership assigns to MWP IV its rights under the Leases, and the Company assumes the Partnership’s obligations under the Leases (the “Lease Assignment and Assumption Agreement”);

(c)The original Leases;

(d)Cash equal to all costs of Closing and prorations to be paid by the Partnership pursuant to Sections 3.6 and 3.7;

(e)All records and files relating to the management or operation of the Contributed Properties, including, without limitation, all tenant files (including correspondence), property tax bills and all calculations used to prepare statements of rental increases under the Leases and statements of common area charges, insurance, property taxes and other charges which are paid by tenants of the Contributed Properties; and

(f)Such additional documents, including written escrow instructions consistent with this Agreement, as may be necessary or desirable for conveyance of the Contributed Properties in accordance with this Agreement.

3.4MWP IV’s Closing Deliverables.  MWP IV shall deliver to the Partnership on or before the Closing the following:

(a)Two signed counterparts of the Lease Assignment and Assumption Agreement;

(b)Cash equal to the prorations to be paid by MWP IV pursuant to Sections 3.6 and 3.7; and

(c)Such additional documents, including written escrow instructions consistent with this Agreement, as may be necessary or desirable for conveyance of the Contributed Properties in accordance with this Agreement.

3.5Closing.  When Escrow Holder has received all documents and funds identified in Sections 3.3 and 3.4, has received written notification from the Company and the Partnership that all conditions to Closing to be satisfied outside of escrow have been satisfied or waived, then, and only then, Escrow Holder shall:

(a)Record the Deeds

(b)To the extent not otherwise delivered to the Company outside of escrow, deliver to the Company:  (i) conformed copies (showing all recording information thereon) of the Deeds; (ii) fully executed originals of the Lease Assignment and Assumption Agreement, and (iii) the original Leases; and

(c)Deliver to the Partnership fully executed originals of the Lease Assignment and Assumption Agreement.

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If applicable, Escrow Holder shall prepare and sign closing statements showing all receipts and disbursements and deliver copies to the Company and the Partnership and shall file with the Internal Revenue Service (with copies to the Company and the Partnership) the reporting statement required under Section 6045(e) of the Internal Revenue Code.

3.6Prorations.  Subject to the other provisions of this Section 3, all receipts and disbursements of the Contributed Properties will be prorated as of 12:01 p.m. on December 31, 2011.

(a)Rents under the Leases shall be apportioned as of the Closing Date.  With respect to any rent arrearages collected under the Leases after Closing, MWP IV shall pay to the Partnership any rent actually collected which is applicable to the period prior to and including the Closing Date.

(b)MWP IV shall be entitled to the total sum of all rental deposits, security deposits, cleaning deposits and other deposits paid to the Partnership by tenants under any Leases.

(c)All real and personal property ad valorem taxes and special assessments, if any, whether payable in installments or not, including without limitation, all supplemental taxes attributable to the period prior to and including the Closing Date for the calendar year in which the Closing occurs, shall be prorated to the Closing Date, based on the latest available tax rate and assessed valuation.  If the amount of any installment of real property taxes is not known as of the Closing Date, then a proration shall be made by the parties based on a reasonable estimate of the real property taxes applicable to the particular Distributed Property and the parties shall adjust the proration when the actual amount becomes known upon the written request of either party made to the other.  The provisions of this Section 3.6(c) shall survive the Closing.

(d)All utility charges shall be prorated as of the Closing Date and MWP IV shall obtain a final billing therefor.  All utility security deposits, if any, shall be retained by the Partnership.

3.7Closing Costs.  The Partnership shall pay transfer taxes, if any.  The Partnership shall pay escrow fees, recording charges and all other closing costs.

3.8Possession.  The Partnership shall deliver exclusive right of possession of the Contributed Properties to MWP IV on the Closing Date.

Section 4   Condition of Contributed Properties

4.1As Is, Where Is Condition.  MWP IV acknowledges and agrees that it will acquire the Contributed Properties in “AS IS, WHERE IS” condition.  MWP IV is willing to acquire the Contributed Properties based solely on MWP IV’s knowledge of the Contributed Properties and the Leases, without relying upon any representations or warranties, express or implied, of any kind whatsoever, from the Partnership or from any of its Partners, or any of their respective affiliates, agents, employees, officers, directors, partners or members.

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Section 5   Redemption and Cancellation of Units

5.1Effective Time.  Effective as of the Closing the Partnership shall be deemed to have transferred the Contributed Properties to the Partners and to have redeemed and canceled the Units identified on Appendix I.

5.2Tax Matters.  For federal and applicable state income tax purposes, each of the parties hereto shall report and treat the distribution of the Contributed Properties as an “assets-over” form partnership division described in Treas. Reg. section 1.708(1)(d)(3)(A) and the basis of the Contributed Properties shall be determined in accordance with Section 732(a) of the Internal Revenue Code.  The Partnership shall use all reasonable efforts to furnish to the Company and the Partners, within 60 days of the close of the current taxable year, the tax information reasonably required by the Company for its federal and state income tax returns.

Section 6   Definitions

As used in this Agreement, the following terms shall have the following meanings:

Closing:  As defined in Section 3.1.

Closing Date:  As defined in Section 3.1.

Title Company:  First American Title Insurance Company, San Jose, California.

Section 7   General Provisions

7.1Other Agreements Superseded; Waiver and Modification.  This Agreement supersedes all prior agreements or understandings, written or oral, between the parties relating to the Company’s interest in the Partnership, and incorporates the entire understanding of the parties with respect thereto.  This Agreement may be amended or supplemented only by a written instrument signed by the party against whom the amendment or supplement is sought to be enforced.  The party benefited by any condition or obligation may waive the same, but such waiver shall not be enforceable by another party unless made by written instrument signed by the waiving party.

7.2Further Assurances.  Each party agrees, at its own expense, to execute, acknowledge and deliver any further instruments reasonably requested by another party, and to take any other action consistent with the terms of this Agreement that may reasonably be requested by the other party, for the purpose of carrying out the terms of this Agreement.

7.3Law Governing.  This Agreement shall be construed in accordance with and governed by the laws of California.

7.4Successors.  This Agreement shall bind and inure to the benefit of the transferees, assigns and other successors in interest of the parties.

7.5Counterparts.  This Agreement may be executed in counterparts.

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7.6References. Unless expressly indicated to the contrary, all references herein to Sections and Exhibits refer to the specified part of this Agreement.  All terms such as “herein,” “hereby” or “hereunder” refer to this Agreement as a whole.

7.7Headings; Date.  The headings used in this Agreement are provided for convenience only and this Agreement shall be interpreted as though they did not appear herein.

[Remainder of page left blank intentionally]

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The parties have duly executed and delivered this Partnership Division Agreement as of the date set forth above.

PARTNERSHIP: MISSION WEST PROPERTIES, L.P., 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	COMPANY: MISSION WEST PROPERTIES, INC., a Maryland corporation By:  /s/ Raymond V. Marino                                                      Name:  Raymond V. Marino                                                        Title:  President & COO
MISSION WEST PROPERTIES, L.P. IV, 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
ACKNOWLEDGED AND APPROVED: LIMITED PARTNERS: CARL E. BERG /s/ Carl E. Berg                                                                           CLYDE J. BERG /s/ Clyde J. Berg                                                                       KARA A. BERG /s/ Kara A. Berg

APPENDIX I

SCHEDULE OF CONTRIBUTED PROPERTIES

AND

DISTRIBUTED UNITS

A.           Contributed Properties

APN 316-22-017 commonly known as 10050 N. De Anza Boulevard, Cupertino, CA with approximately 211,000 sq. ft. of building improvements

APN 316-22-018 commonly known as 20400 Mariani Avenue, Cupertino, CA with approximately 105,000 sq. ft. of building improvements

B.           Units of Partnership Interests

	Mission West Properties, Inc.	Carl E. Berg	Clyde J. Berg	Kara A. Berg	Total
Mission West Properties L.P., I (“MWP I”) Units	3,262,665	9,449,114	1,379,867	835,152	14,926,798
Redeemed/Cancelled MWP I Units	(2,510,815)	(7,271,656)	(1,061,890)	(642,699)	(11,487,060)
Mission West Properties L.P. IV Units	2,510,815	7,271,656	1,061,890	642,699	11,487,060

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EX-10.1.8

EXHIBIT 10.1.8

PARTNERSHIP DIVISION AGREEMENT

This Partnership Division Agreement (this “Agreement”) is entered into as of December 21, 2011, by and among Mission West Properties, L.P. II, a Delaware limited partnership (the “Partnership”), Mission West Properties, Inc., a Maryland corporation (the “Company”), and Mission West Properties, L.P. V, a Delaware limited partnership (“MWP V”).  Certain of the defined terms used in this Agreement are set forth in Section 6.

RECITALS

A.           The Company is the sole general partner of the Partnership.  The Partnership is governed by that certain Amended and Restated Agreement of Limited Partnership dated as of July 1, 1998 (the “Partnership Agreement”).  Unless otherwise defined in Section 6 of this Agreement, capitalized terms used in this Agreement have the meanings provided in the Partnership Agreement.

B.           The Partnership wishes to distribute certain Units of Partnership Interests pro rata to all of the existing Partners of the Partnership in proportion to the number of Units of Partnership Interest held by each Partner as of the date of this Agreement in a partnership division described in section 1.708-1(d)(3)(A) of the Regulations (the “Division”).

C.           The Division is to be effected through the formation of MWP V by the Partnership; the creation of an Agreement of Limited Partnership of MWP V containing terms substantially identical to those of the Partnership Agreement; the transfer of certain properties to MWP V by the Partnership; and the distribution of Units of Partnership Interests to each of the Partners therein in proportion to their respective Partnership Interests in the Partnership followed by the redemption and cancellation of the number of Units of Partnership Interest of the Partnership equal to the number and percentages of Units in MWP V distributed, which amount has been calculated by determining the same proportion to the total number of outstanding Units of Partnership Interest of the Partnership that the fair market value of the contributed properties bears to the total fair market value net of qualified non-recourse debt of all of the properties owned by the Partnership, determined as of the date of the distribution.

D.           The limited partners of the Partnership have approved the Division and related transactions described in this Agreement.

E.           Subject to and on the terms and conditions of this Agreement, on the Closing Date (as defined in Section 3.1) the Partnership shall contribute to MWP V the real properties described in the attached Appendix I (collectively, the “Contributed Properties”) and shall distribute, transfer and assign to the Partners identified on Appendix I, in the percentages indicated thereon, in partial redemption and cancellation of the number of Units of Partnership Interest held by each such Partner as further set forth on Appendix I:

In this context, the Partnership, the Company and MWP V agree as follows:

Section 1   Contribution of Real Properties and Other Assets

On the Closing Date, the Partnership shall contribute certain properties and assign certain contracts to MWP V, and MWP V agrees to accept such properties and assume such contracts as follows:

1.1Contributed Properties.  All of the Partnership’s right, title and interest in and to each of the real properties described in the Contributed Properties in the attached Appendix I, together with (a) any and all buildings, structures, systems, facilities, fixtures, fences and parking areas located on the Contributed Properties and any and all machinery, equipment, apparatus and appliances (not owned by tenants) used in connection with the operation or occupancy of the Contributed Properties and any leasehold interest in all such improvements leased by the Partnership, (b) all privileges, rights, easements and appurtenances belonging to the Contributed Properties, (c) all development rights, air rights, water and sewer capacity rights and water stock relating to the Contributed Properties, and (d) all right, title and interest of the Partnership in and to any streets, alleys, passages, common areas, other easements and other rights-of-way or appurtenances included in, adjacent to or used in connection with the Contributed Properties (collectively, the “Improvements”);

1.2Personal Property.  All of the Partnership’s right, title and interest in and to any personal property located within or used in connection with the Contributed Properties;

1.3Leases.  All of the Partnership’s right, title and interest in and to the leases, licenses and other occupancy agreements with tenants relating to the use or occupancy of any portion of any of the Contributed Properties, including any amendments to the foregoing (collectively, the “Leases”);

1.4Service Contracts.  All of the Partnership’s right, title and interest in and to the contracts (other than the Leases) entered into by the Partnership or its property manager or leasing agent relating to the management, maintenance, leasing or operation of any of the Contributed Properties, if any;

1.5Other Assets.  If any, all of the Partnership’s right, title and interest in and to all tangible and intangible assets of any nature relating exclusively to the Contributed Properties or the Personal Property, including without limitation (a) all warranties upon the Improvements or Personal Property, to the full extent such warranties are assignable, (b) copies of all plans, specifications, engineering drawings and prints relating to the construction of the Improvements, (c) all copyrights, logos, designs, trademarks, trade names, service marks, phone numbers and all goodwill associated with the Contributed Properties, (d) all other intellectual or intangible property used by the Partnership in connection with the Contributed Properties, (e) all rental deposits, security deposits, pet deposits, cleaning deposits and other deposits given by tenants to secure their performance under the Leases; and (f) all claims and causes of action arising out of or in connection with the Contributed Properties (other than claims for delinquent rents and other tenant obligations which the Partnership may retain pursuant to Section 3.6(a)); and

1.6Excluded Assets.  MWP V shall not be entitled to receive, and the Partnership shall retain, all other real properties held by the Partnership (the “Retained Properties”), the

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leases, licenses and other occupancy agreements with tenants relating to the use or occupancy of any portion of any of the Retained Properties, including any amendments to the foregoing (collectively, the “Retained Leases”), all service contracts other than the Service Contracts and the Terminated Contracts, any and all assets of the type described in Section 1.5 that relate to the Retained Properties and the Retained Leases.

Section 2   Allocation of Obligations

2.1Leases and Service Contracts.  On the Closing Date, MWP V shall assume the Partnership’s obligations under the Leases and the Service Contracts (other than the Terminated Contracts).

2.2Indemnification.

(a)MWP V shall indemnify and hold harmless the Partnership, its partners, and their respective partners, directors, officers, employees and agents (collectively, the “Partnership Indemnified Parties”) from and against any claim, loss, damage, liability or expenses, including, without limitation, reasonable attorneys’ fees and court costs, incurred by the Partnership Indemnified Parties after the Closing Date with respect to the Contributed Properties, the Leases, and the Service Contracts.

(b)The Partnership shall indemnify and hold harmless MWP V, its shareholders, officers, directors and employees, and their respective partners, directors, officers, employees and agents (collectively, the “MWP V Indemnified Parties”) from and against any claim, loss, damage, liability or expenses, including, without limitation, reasonable attorneys’ fees and court costs, incurred by the MWP V Indemnified Parties after the Closing Date with respect to the Retained Properties, the Retained Leases, and any contracts of the Partnership other than the Service Contracts.

Section 3   Closing

3.1Closing Date.  The parties shall close the transaction contemplated by this Agreement (the “Closing”) on December 31, 2011, or such other date as is mutually agreed between the Partnership and the Company (the “Closing Date”).

3.2Escrow.  This Section 3, together with such additional instructions as First American Title Insurance Company, San Jose, California, Attention: Liz Zankich (“Escrow Holder”) shall reasonably request and the parties shall agree to, shall constitute the escrow instructions to Escrow Holder.  If there is any inconsistency between this Agreement and the Escrow Holder’s additional instructions, this Agreement shall control unless the intent to amend this Agreement is clearly stated in such additional instructions.

3.3The Partnership’s Closing Deliverables.  The Partnership shall deliver to MWP V on or before the Closing (or, in the case of the items referred to in Sections 3.3(a), deliver to the Escrow Holder prior to the Closing Date) the following:

(a)Duly executed and acknowledged grant deeds (the “Deeds”), conveying each of the Contributed Properties to MWP V;

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(b)Two signed counterparts of an assignment and assumption agreement, in which the Partnership assigns to MWP V its rights under the Leases, and the Company assumes the Partnership’s obligations under the Leases (the “Lease Assignment and Assumption Agreement”);

(c)The original Leases;

(d)Cash equal to all costs of Closing and prorations to be paid by the Partnership pursuant to Sections 3.6 and 3.7;

(e)All records and files relating to the management or operation of the Contributed Properties, including, without limitation, all tenant files (including correspondence), property tax bills and all calculations used to prepare statements of rental increases under the Leases and statements of common area charges, insurance, property taxes and other charges which are paid by tenants of the Contributed Properties; and

(f)Such additional documents, including written escrow instructions consistent with this Agreement, as may be necessary or desirable for conveyance of the Contributed Properties in accordance with this Agreement.

3.4MWP V’s Closing Deliverables.  MWP V shall deliver to the Partnership on or before the Closing the following:

(a)Two signed counterparts of the Lease Assignment and Assumption Agreement;

(b)Cash equal to the prorations to be paid by MWP V pursuant to Sections 3.6 and 3.7; and

(c)Such additional documents, including written escrow instructions consistent with this Agreement, as may be necessary or desirable for conveyance of the Contributed Properties in accordance with this Agreement.

3.5Closing.  When Escrow Holder has received all documents and funds identified in Sections 3.3 and 3.4, has received written notification from the Company and the Partnership that all conditions to Closing to be satisfied outside of escrow have been satisfied or waived, then, and only then, Escrow Holder shall:

(a)Record the Deeds

(b)To the extent not otherwise delivered to the Company outside of escrow, deliver to the Company:  (i) conformed copies (showing all recording information thereon) of the Deeds; (ii) fully executed originals of the Lease Assignment and Assumption Agreement, and (iii) the original Leases; and,

(c)Deliver to the Partnership fully executed originals of the Lease Assignment and Assumption Agreement.

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If applicable, Escrow Holder shall prepare and sign closing statements showing all receipts and disbursements and deliver copies to the Company and the Partnership and shall file with the Internal Revenue Service (with copies to the Company and the Partnership) the reporting statement required under Section 6045(e) of the Internal Revenue Code.

3.6Prorations.  Subject to the other provisions of this Section 3, all receipts and disbursements of the Contributed Properties will be prorated as of 12:01 p.m. on December 31, 2011.

(a)Rents under the Leases shall be apportioned as of the Closing Date.  With respect to any rent arrearages collected under the Leases after Closing, MWP V shall pay to the Partnership any rent actually collected which is applicable to the period prior to and including the Closing Date.

(b)MWP V shall be entitled to the total sum of all rental deposits, security deposits, cleaning deposits and other deposits paid to the Partnership by tenants under any Leases.

(c)All real and personal property ad valorem taxes and special assessments, if any, whether payable in installments or not, including without limitation, all supplemental taxes attributable to the period prior to and including the Closing Date for the calendar year in which the Closing occurs, shall be prorated to the Closing Date, based on the latest available tax rate and assessed valuation.  If the amount of any installment of real property taxes is not known as of the Closing Date, then a proration shall be made by the parties based on a reasonable estimate of the real property taxes applicable to the particular Distributed Property and the parties shall adjust the proration when the actual amount becomes known upon the written request of either party made to the other.  The provisions of this Section 3.6(c) shall survive the Closing.

(d)All utility charges shall be prorated as of the Closing Date and MWP V shall obtain a final billing therefor.  All utility security deposits, if any, shall be retained by the Partnership.

3.7Closing Costs.  The Partnership shall pay transfer taxes, if any.  The Partnership shall pay escrow fees, recording charges and all other closing costs.

3.8Possession.  The Partnership shall deliver exclusive right of possession of the Contributed Properties to MWP V on the Closing Date.

Section 4   Condition of Contributed Properties

4.1As Is, Where Is Condition.  MWP V acknowledges and agrees that it will acquire the Contributed Properties in “AS IS, WHERE IS” condition.  MWP V is willing to acquire the Contributed Properties based solely on MWP V’s knowledge of the Contributed Properties and the Leases, without relying upon any representations or warranties, express or implied, of any kind whatsoever, from the Partnership or from any of its Partners, or any of their respective affiliates, agents, employees, officers, directors, partners or members.

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Section 5   Redemption and Cancellation of Units

5.1Effective Time.  Effective as of the Closing the Partnership shall be deemed to have transferred the Contributed Properties to the Partners and to have redeemed and canceled the Units identified on Appendix I.

5.2Tax Matters.  For federal and applicable state income tax purposes, each of the parties hereto shall report and treat the distribution of the Contributed Properties as an “assets-over” form partnership division described in Treas. Reg. section 1.708(1)(d)(3)(A) and the basis of the Contributed Properties shall be determined in accordance with Section 732(a) of the Internal Revenue Code.  The Partnership shall use all reasonable efforts to furnish to the Company and the Partners, within 60 days of the close of the current taxable year, the tax information reasonably required by the Company for its federal and state income tax returns.

Section 6   Definitions

As used in this Agreement, the following terms shall have the following meanings:

Closing:  As defined in Section 3.1.

Closing Date:  As defined in Section 3.1.

Title Company:  First American Title Insurance Company, San Jose, California.

Section 7   General Provisions

7.1Other Agreements Superseded; Waiver and Modification.  This Agreement supersedes all prior agreements or understandings, written or oral, between the parties relating to the Company’s interest in the Partnership, and incorporates the entire understanding of the parties with respect thereto.  This Agreement may be amended or supplemented only by a written instrument signed by the party against whom the amendment or supplement is sought to be enforced.  The party benefited by any condition or obligation may waive the same, but such waiver shall not be enforceable by another party unless made by written instrument signed by the waiving party.

7.2Further Assurances.  Each party agrees, at its own expense, to execute, acknowledge and deliver any further instruments reasonably requested by another party, and to take any other action consistent with the terms of this Agreement that may reasonably be requested by the other party, for the purpose of carrying out the terms of this Agreement.

7.3Law Governing.  This Agreement shall be construed in accordance with and governed by the laws of California.

7.4Successors.  This Agreement shall bind and inure to the benefit of the transferees, assigns and other successors in interest of the parties.

7.5Counterparts.  This Agreement may be executed in counterparts.

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7.6References. Unless expressly indicated to the contrary, all references herein to Sections and Exhibits refer to the specified part of this Agreement.  All terms such as “herein,” “hereby” or “hereunder” refer to this Agreement as a whole.

7.7Headings; Date.  The headings used in this Agreement are provided for convenience only and this Agreement shall be interpreted as though they did not appear herein.

[Remainder of page left blank intentionally]

-7-

The parties have duly executed and delivered this Partnership Division Agreement as of the date set forth above.

PARTNERSHIP: MISSION WEST PROPERTIES, L.P., 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	COMPANY: MISSION WEST PROPERTIES, INC., a Maryland corporation By:  /s/ Raymond V. Marino                                                      Name:  Raymond V. Marino                                                      Title:  President & COO
MISSION WEST PROPERTIES, L.P. V, 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
ACKNOWLEDGED AND APPROVED: LIMITED PARTNERS: CARL E. BERG /s/ Carl E. Berg CLYDE J. BERG /s/ Clyde J. Berg

APPENDIX I

SCHEDULE OF CONTRIBUTED PROPERTIES

AND

DISTRIBUTED UNITS

A.           Contributed Properties

APN 086-36-043 consisting of approximately 148,600 square feet of improvements located in three buildings at the corner of Montague and Trade Zone, California

APNs 086-41-019, 020-022; 086-33-094, 095, 098, 099 more particularly described as Parcels 4, 5, 9, 10, 11, 12, and 13 of McCandless Technology Park, Milpitas, California

B.           Units of Partnership Interests

	Mission West Properties, Inc.	Carl E. Berg	Clyde J. Berg	Total
Mission West Properties L.P., II (“MWP II”) Units	6,315,553	16,189,610	16,189,610	38,694,773
Redeemed/Cancelled MWP II Units	(2,411,330)	(6,181,326)	(6,181,326)	(14,773,983)
Mission West Properties L.P. V Units	2,411,330	6,181,326	6,181,326	14,773,983

A/74671850.1                                                                     

-1-

EX-10.2.1

EXHIBIT 10.2.1

AMENDMENT TO

EXCHANGE RIGHTS AGREEMENT

This Amendment to the Exchange Rights Agreement (the “Exchange Agreement”) dated as of December 29, 1998 by and among Mission West Properties, Inc., a Maryland corporation (the “Company”), each of Mission West Properties, L.P., a Delaware limited partnership (“MWP”), Mission West Properties, L.P. I, a Delaware limited partnership (“MWP I”), Mission West Properties, L.P. II, a Delaware limited partnership (“MWP II”) and Mission West Properties, L.P. III, a Delaware limited partnership (MWP III, and collectively with MWP, MWP I and MWP II, the “Operating Partnership”), and each of the limited partners in the Operating Partnership listed on the signature pages thereto (the “Limited Partners”), is hereby approved and adopted in accordance with Section 12.9 of the Agreement with the consent of a majority-in-interest of the Limited Partners who are parties to the Agreement.  Capitalized terms not otherwise defined in this Amendment have the meanings provided under the Agreement;

WHEREAS, pursuant to a Partnership Division Agreement dated as of December 21, 2011, MWP I formed Mission West Properties, L.P. IV, a Delaware limited partnership (“MWP IV”), contributed certain properties to MWP IV in exchange for a certain number of L.P. Units of partnership interests in MWP IV and distributed the L.P. Units of MWP IV pro rata to the Company and the limited partners of MWP I in proportion to and in redemption and cancellation of the same number of L.P. Units of MWP I as the number of L.P. Units in MWP IV that were distributed by MWP I;

WHEREAS, pursuant to a Partnership Division Agreement dated as of December 21, 2011, MWP II formed Mission West Properties, L.P. V, a Delaware limited partnership (“MWP V”), contributed certain properties to MWP V in exchange for a certain number of L.P. Units of partnership interests in MWP V and distributed the L.P. Units of MWP V pro rata to the Company and limited partners of MWP II in proportion to and in redemption and cancellation of the same number of L.P. Units of MWP II as the number of L.P. Units in MWP V that were distributed by MWP II; and

WHEREAS, the parties hereto are entering into this Amendment to the Exchange Agreement to provide for the rights of the Limited Partners of MWP IV and MWP V to (i) tender their L.P. Units in those partnerships in exchange for shares of the Company’s common stock, cash or a combination of common stock and cash, on the terms and conditions set forth herein, and (ii) the delivery of registered shares of common stock to them upon any such tender pursuant to the terms of the Exchange Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual covenant set forth herein, the parties hereto agree as follows:

1.The undersigned Limited Partners approve this Amendment to add MWP IV and MWP V and the Limited Partners thereof as parties to the Exchange Agreement, which additions shall be effective from the date hereof with respect to all of the Limited Partners and L.P. Units MWP IV and MWP V outstanding from time to time in accordance with the terms of the Exchange Agreement and the Partnership Agreements of each of MWP IV and MWP V.  

Pursuant to this Amendment all of the terms of the Exchange Agreement shall be applicable to MWP IV, MWP V and their respective Limited Partners and L.P. Units, and by their signatures to this Amendment each of them hereby agrees to be bound by the terms of the Exchange Agreement.

2.Survival.  Except as otherwise expressly provided herein, the Exchange Agreement will continue in full force and effect, in accordance with its terms.  The provisions of Section 12 of the Exchange Agreement are incorporated by reference in this Amendment.

3.Miscellaneous.  This Amendment and waivers and consents hereunder shall be governed by the internal laws of California.  This Amendment constitutes the full and entire understanding and agreement among the parties with regard to the subject matter contained herein, and supersedes all prior written and oral agreements, representations and commitments, if any, among the parties with respect to such subject matter, provided that each party hereto hereby agrees to take such other actions and execute such additional documents as may be necessary to effectuate the terms of this Amendment. This Amendment may be executed in counterparts and delivered by electronic facsimile transmission, and each signed counterpart transmitted by electronic facsimile shall be considered an original, but all of which together shall constitute the same instrument. Any provision of this Amendment may be waived or modified only in accordance with Section 12.9 of the Agreement.

[Remainder of page intentionally left blank]

-2-

In Witness Whereof, the parties hereto have hereunto executed this Agreement as of the first date written above, and a party’s signature hereon in any capacity shall constitute such party’s execution of this Agreement in all capacities which the party holds for purposes of this Agreement.

Mission West Properties, Inc. a Maryland corporation

By: /s/ Raymond V. Marino                                                                

Its: President & COO  

Mission West Properties, L.P., a Delaware limited partnership

By:        Mission West Properties, Inc.

Its:        General Partner

By: /s/ Raymond V. Marino                                                         

Its:      President & COO                                                    

By:        Mission West Properties, L.P I, a Delaware limited partnership

By:        Mission West Properties, Inc.

Its:        General Partner

By: /s/ Raymond V. Marino                                                         

Its:      President & COO                                                    

By:        Mission West Properties, L.P II, a Delaware limited partnership

By:        Mission West Properties, Inc.

Its:        General Partner

By: /s/ Raymond V. Marino                                                         

Its:      President & COO                                                    

[Signature Pages of Exchange Rights Agreement]

By:        Mission West Properties, L.P III, a Delaware limited partnership

By:        Mission West Properties, Inc.

Its:        General Partner

By:      /s/ Raymond V. Marino

Its:      President & COO                                                    

By:        Mission West Properties, L.P IV, a Delaware limited partnership

By:        Mission West Properties, Inc.

Its:        General Partner

By:      /s/ Raymond V. Marino

Its:      President & COO                                                    

By:        Mission West Properties, L.P. V, a Delaware limited partnership

By:        Mission West Properties, Inc.

Its:        General Partner

By:      /s/ Raymond V. Marino

Its:      President & COO                                                    

1981 Kara Ann Berg Trust

By: /s/ Clyde J. Berg                                                                

      Clyde J. Berg, Trustee

[Signature Pages of Exchange Rights Agreement]

Berg & Berg Enterprises Inc., a California corporation

By: /s/ Carl E. Berg                                                                

      Carl E. Berg

      Its:  President

Berg Living Trust UTA dated May 1, 1981

By: /s/ Carl E. Berg                                                                

      Carl E. Berg

      Its:  Trustee

By: /s/ Mary Ann Berg                                                                

                                                                                                      Mary Ann Berg

                                                                                                      Its:  Trustee

[Signature Pages of Exchange Rights Agreement]

Clyde J. Berg, Trustee, 1995 Clyde J. Berg Revocable Trust, dated April 4, 1995

By: /s/ Clyde J. Berg                                                                

       Clyde J. Berg

       Its:  Trustee

By: /s/ Kara A. Berg                                                                

      Kara A. Berg

By: /s/ Carl E. Berg                                                                

       Carl E. Berg

By: /s/ Mary Anne Berg                                                                

       Mary Ann Berg

By: /s/ Clyde J. Berg                                                                

       Clyde J. Berg

West Coast Venture Capital, Inc.

By: /s/ Carl E. Berg                                                                

Its:        President

[Signature Pages of Exchange Rights Agreement]

EX-10.29.5

EXHIBIT 10.29.5

PROMISSORY NOTE

$1,966,840.39 January 5, 2012

Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II, and Mission West Properties, L.P. III (collectively referred to herein as “Mission”)

promises to pay to The Berg Group

the principal sum of One Million Nine Hundred Sixty Six Thousand Eight Hundred Forty Dollars and 39 Cents ($1,966,840.39),

plus interest at the rate of 30 day LIBOR plus 1.75 percent per annum (compounded on the basis of a 366-day year) beginning on the 5th day of January, 2012.

Should interest not so be paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of interest when due, the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note.  Should suit be commenced or an attorney employed to enforce the payment of this note, we agree to pay such additional sum as the court may adjudge as reasonable attorney’s fees in said suit. Principal and interest are payable in lawful money of the United States.

Principal and interest are payable in lawful money of the United States no later than January 31, 2012.  Notwithstanding the above, Mission shall use its best efforts to repay the loan as soon as possible using all available sources of cash, including but not limited to cash generated from operations and cash available from any other financing sources.

Signed By:	/s/ Raymond V. Marino	1/5/2012
	Raymond V. Marino, Pres. & COO	Date
	Mission West Properties, Inc.
	Its General Partner

Acknowledged:	/s/ Carl E. Berg	1/5/2012
	Carl E. Berg	Date

EX-10.29.6

EXHIBIT 10.29.6

PROMISSORY NOTE

$11,479,365.00 February 1, 2012

Mission West Properties, L.P.

promises to pay to Lightpointe Communications, Inc.

the principal sum of Eleven Million Four Hundred Seventy Nine Thousand Three Hundred Sixty Five Dollars ($11,479,365.00),

plus interest at the rate of LIBOR plus 1.75 percent per annum (compounded on the basis of a 366-day year) beginning on the 1st day of February 2012.

Should interest not so be paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of interest when due, the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note.  Should suit be commenced or an attorney employed to enforce the payment of this note, we agree to pay such additional sum as the court may adjudge as reasonable attorney’s fees in said suit. Principal and interest are payable in lawful money of the United States.

Principal and interest are payable in lawful money of the United States no later than July 15, 2012 with option for Mission to extend another six months.  Notwithstanding the above, Mission shall use its best efforts to repay the loan as soon as possible using all available sources of cash, including but not limited to cash generated from operations and cash available from any other financing sources.

Signed By:	/s/ Raymond V. Marino	2/1/2012
	Raymond V. Marino, Pres. & COO	Date
	Mission West Properties, Inc.
	Its General Partner

Acknowledged:	/s/ Carl E. Berg	2/1/2012
	Carl E. Berg	Date

EX-10.4.4

EXHIBIT 10.4.4

SECOND AMENDMENT TO ACQUISITION AGREEMENT

This Second Amendment to Acquisition Agreement is made and entered into as of December 30, 2011, by and among Mission West Properties, Inc., a Maryland corporation (the “Company”), Mission West Properties, L.P., a Delaware limited partnership (“MWP”), Mission West Properties, L.P. I, a Delaware limited partnership (“MWP I”), Mission West Properties, L.P. II, a Delaware limited partnership (“MWP II”), Mission West Properties, L.P. III, a Delaware limited partnership (“MWP III”), Mission West Properties, L.P. IV, a Delaware limited partnership (“MWP IV”), Mission West Properties, L.P. V, a Delaware limited partnership (“MWP V”), and [each of the limited partners of the respective partnerships (the “Partners”).]

RECITALS

WHEREAS, the parties hereto (other than MWP IV and MWP V) entered into an Acquisition Agreement dated May 14, 1998 (the “Acquisition Agreement”) pursuant to which the parties thereto may amend the Acquisition Agreement by a writing executed by the party or parties against whom enforcement is sought in accordance with Section 14.4 thereof.

WHEREAS, the parties amended the Acquisition Agreement pursuant to an Amendment to Acquisition Agreement dated as of July 1, 1998 and pursuant to the terms of a Supplemental Agreement among the Company, Carl E. Berg and Clyde J. Berg dated as of June 1999 (collectively with the original agreement the “Acquisition Agreement”).

WHEREAS, pursuant to a Partnership Division Agreement dated as of December 21, 2011, MWP I formed MWP IV, contributed certain of its properties to MWP IV and distributed units of Partnership Interests to each of the partners therein in proportion to their respective Partnership Interests in MWP I followed by the redemption and cancellation of the number of units of Partnership Interest of MWP I equal to the number of units of Partnership Interest in MWP IV distributed, which amount has been calculated by determining the same proportion to the total number of outstanding units of Partnership Interest of MWP I that the fair market value net of debt of the contributed properties bears to the total fair market value net of debt of all of the properties owned by the MWP I, determined as of the date of the distribution.

WHEREAS, pursuant to a Partnership Division Agreement dated as of December 21, 2011, MWP I formed MWP V, contributed certain of its properties to MWP V and distributed units of Partnership Interests to each of the partners therein in proportion to their respective Partnership Interests in MWP II followed by the redemption and cancellation of the number of units of Partnership Interest of MWP II equal to the number and percentages of units of Partnership Interest in MWP V distributed, which amount has been calculated by determining the same proportion to the total number of outstanding units of Partnership Interest of MWP II that the fair market value net of debt of the contributed properties bears to the total fair market value net of debt of all of the properties owned by MWP II, determined as of the date of the distribution.

WHEREAS, the parties now desire to amend the terms of the Acquisition Agreement to provide for the changes set forth below.

NOW, THEREFORE, in consideration of the premises and the mutual covenant set forth herein, the parties hereto agree as follows:

-1-

1.ADDITION OF NEW PARTIES.  The undersigned Limited Partners approve this Amendment to add MWP IV and MWP V as parties to the Acquisition Agreement, which additions shall be effective from the date hereof with respect to all of the Limited Partners and L.P. Units of such limited partnerships outstanding from time to time in accordance with the terms of the Acquisition Agreement and the Partnership Agreements of each of MWP IV and MWP V.

2.           EFFECT OF AMENDMENT.  Pursuant to this Amendment all of the terms of the Acquisition Agreement shall be applicable to MWP IV, MWP V and their respective Limited Partners and L.P. Units other than the provisions of Sections 4-8.10 and 11, which no longer apply, and all of them agree to be bound by such remaining terms of the Acquisition Agreement.

3.           INCORPORATION BY REFERENCE.  The provisions of Section 13 and 14 of the Acquisition Agreement are incorporated by reference in this Amendment.

4.           SURVIVAL.  Except as otherwise expressly provided herein, the Acquisition Agreement will continue in full force and effect, in accordance with its terms.

5.           MISCELLANEOUS.  This Amendment and waivers and consents hereunder shall be governed by the internal laws of California, without regard to the conflicts of law principles thereof.  This Amendment constitutes the full and entire understanding and agreement among the parties with regard to the subject matter contained herein, and supersedes all prior written and oral agreements, representations and commitments, if any, among the parties with respect to such subject matter, provided that each party hereto hereby agrees to take such other actions and execute such additional documents as may be necessary to effectuate the terms of this Amendment. This Amendment may be executed in counterparts and delivered by electronic facsimile transmission, and each signed counterpart transmitted by electronic facsimile shall be considered an original, but all of which together shall constitute the same instrument. Any provision of this Amendment may be waived or modified only in accordance with Section 14.4 of the Acquisition Agreement.

[Remainder of the page intentionally left blank]

-2-

SIGNATURE PAGES OF AMENDMENT TO ACQUISITION AGREEMENT

IN WITNESS WHEREOF, the parties hereto have hereunto executed this Amendment as of the first date written above, and a party’s signature hereon in any capacity shall constitute such party’s execution of this Amendment in all capacities which the party holds for purposes of this Amendment.

Mission West Properties, Inc., a Maryland corporation

By: /s/ Raymond V. Marino                                                                

Its:  President & COO        

Mission West Properties, L.P., a Delaware limited partnership

By:  Mission West Properties, Inc.

Its:  General Partner

By: /s/ Raymond V. Marino                                                        

           Its:  President & COO

Mission West Properties, L.P. I, a Delaware limited partnership

By:     Mission West Properties, Inc.

Its:  General Partner

By: /s/ Raymond V. Marino                                                        

           Its:  President & COO

Mission West Properties, L.P. II, a Delaware limited partnership

By:     Mission West Properties, Inc.

Its:  General Partner

By: /s/ Raymond V. Marino                                                         

Its:  President & COO     

Mission West Properties, L.P. III, a Delaware Limited Partnership

By:     Mission West Properties, Inc.

Its:  General Partner

By: /s/ Raymond V. Marino                                                         

Its:  President & COO                                                         

Mission West Properties, L.P. IV, a Delaware Limited Partnership

By:     Mission West Properties, Inc.

Its:  General Partner

By: /s/ Raymond V. Marino                                                         

Its:  President & COO                                                         

Mission West Properties, L.P. V, a Delaware Limited Partnership

By:     Mission West Properties, Inc.

Its:  General Partner

By: /s/ Raymond V. Marino                                                         

Its:  President & COO                                                         

1981 Kara Ann Berg Trust

By: /s/ Clyde J. Berg                                                               

      Clyde J. Berg, Trustee

Berg & Berg Enterprises Inc., a California corporation

By: /s/ Carl E. Berg                                                                

      Carl E. Berg

      Its:  President

Berg Living Trust UTA dated May 1, 1981

By: /s/ Carl E. Berg                                                                

      Carl E. Berg

      Its:  Trustee

By: s/ Mary Ann Berg                                                                

       Mary Ann Berg

       Its:  Trustee

Clyde J. Berg, Trustee, 1995 Clyde J. Berg Revocable Trust, dated April 4, 1995

By: /s/ Clyde J. Berg                                                                

       Clyde J. Berg

                                                                                                       Its:  Trustee

By: /s/ Kara A. Berg                                                                

      Kara A. Berg

By: /s/ Carl E. Berg                                                                

       Carl E. Berg

By: /s/ Mary Ann Berg                                                                

       Mary Ann Berg

By: /s/ Clyde J. Berg                                                                

       Clyde J. Berg

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Mission West Properties, Inc.:

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 15, 2012, relating to the consolidated financial statements, schedules and the effectiveness of Mission West Properties, Inc.’s internal control over financial reporting, which appear in this Annual Report on Form 10-K.

\S\ Burr Pilger Mayer, Inc.

San Francisco, California

March 15, 2012

EX-31.1

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;

4. 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 15, 2012

By: /s/ Carl E. Berg

Carl E. Berg

Chairman & Chief Executive Officer

EX-31.2

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;

4. 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 15, 2012

By: /s/ Raymond V. Marino

Raymond V. Marino

President & Chief Operating Officer

EX-31.3

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;

4. 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 15, 2012

By: /s/ Wayne N. Pham

Wayne N. Pham

Vice President of Finance

EX-32.1

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, 2011, 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.

By: /s/ Carl E. Berg

Carl E. Berg

Chairman of the Board and Chief Executive Officer

March 15, 2012

By: /s/ Raymond V. Marino

Raymond V. Marino

President and Chief Operating Officer

March 15, 2012

By: /s/ Wayne N. Pham

Wayne N. Pham

Vice President of Finance

March 15, 2012

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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Note 18 - Acquisition-related Intangible Assets

12 Months Ended

Dec. 31, 2011

Note 18 - Acquisition-related Intangible Assets Disclosure

Note 18 - Acquisition-related Intangible Assets

18.     ACQUISITION-RELATED INTANGIBLE ASSETS

Amortization expense related to in-place leases of approximately $981, $708 and $637 was recorded for the years ended December 31, 2011, 2010 and 2009, respectively.

Details of real estate related intangible assets at December 31, 2011 and 2010 are as follows:

	December 31,
	2011			2010
	(dollars in thousands)
Amortizable intangible assets:
Real estate related intangible assets	$	3,561		$	3,240
Accumulated amortization		(1,548	)		(2,687	)
Net real estate related intangible assets	$	2,013		$	553

The estimated aggregate amortization expense for the real estate related intangible assets for the remaining fiscal years as of December 31, 2011, is as follows:

Year	Estimated In-place Lease Amortization (expense)
	(dollars in thousands)
2012	$	1,204
2013		176
2014		138
2015		138
2016		138
Thereafter		219
Total	$	2,013

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Note 2 - Basis of Presentation and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Note 2 - Basis of Presentation and Summary of Significant Accounting Policies Disclosure

Note 2 - Basis of Presentation and Summary of Significant Accounting Policies

2.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Financial Statement Presentation

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.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, allocation of purchase price relating to property acquisitions, accrued liabilities, and Mission West Properties, Inc.’s qualification as a REIT. The Company bases its estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. 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.

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with current accounting guidance, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values.

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 net fair value of acquired in-place leases at December 31, 2011 and 2010 was approximately $2,013 and $553, respectively.

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. There were no above or below market component of acquired in-place leases as of December 31, 2011 and 2010.

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 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%. 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, 2011 and 2010.

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.

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 had 13 properties classified as held for sale as of December 31, 2011, and one as of December 31, 2010.

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. As of December 31, 2011 and 2010, cash was approximately $0 and $3,988, respectively. The Company had no cash equivalents at December 31, 2011 and 2010.

Restricted Cash

Restricted cash totaled approximately $6,892 as of December 31, 2010. Of this amount, approximately $6,803 represents proceeds received from the 1325-1375 McCandless Drive property sale and earned interest income held in a separate cash account at a trust company for future use in tax-deferred exchanges and approximately $89 represents a balance the Company had consolidated due to the accounting provisions 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. In 2011, the Company transferred the entire balance from restricted cash to its general cash account because it did not pursue a tax-deferred exchange and its agreement with the variable interest entity terminated.

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 were considered restricted because they were 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, 2011 and 2010, the Company recorded net realized and unrealized gain of approximately $0 and $4,067, respectively, related to the sale of the securities and the increase in fair value of the marketable securities. As of December 31, 2011, the Company had no investments in marketable securities.

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 for details and Note 22 for the application of this obligation by the Berg Group).

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.

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” 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. Provisions against “Deferred rent” 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 tenants’ 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, 2011, 2010 and 2009, no provision for federal income taxes has been included in the accompanying consolidated financial statements.

For the year ended December 31, 2011, the Company’s total dividends paid or payable to the stockholders represented approximately 95.4% ordinary income and 4.6% long-term capital gain for income tax purposes (unaudited). For the year ended December 31, 2010, the Company’s total dividends paid or payable to the stockholders represented approximately 83.7% ordinary income and 16.3% long-term capital gain for income tax purposes (unaudited). 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).

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 allocated 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, 2011, 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, 2011, the Company recorded approximately $57 of expense for share-based compensation relating to stock options.

In 2005, the 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 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 remain in effect for each key employee as long as they continue to be employed by the Company.

A new non-employee outside director was awarded 45,000 DERs when he joined the Company’s board of directors in 2008. As of December 31, 2011, there were a total of 275,000 DERs. The Company recorded DER compensation expense of approximately $143, $165 and $179 in 2011, 2010 and 2009, respectively.

Fair Value

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. In the second quarter of 2010, the Company sold all of its restricted investment in marketable securities. As of December 31, 2011, the Company did not have any financial assets where it had to measure the fair value.

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 arrangements. The fair value of the Company’s fixed rate debt at December 31, 2011, was approximately $357,260 compared with its carrying value of approximately $338,305. As of December 31, 2011, the Company did not have any financial instruments that were required to be recorded at fair value on a recurring basis.

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.

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 63 tenants at December 31, 2011, default by any major tenant could significantly impact the results of the consolidated total. One tenant, Microsoft Corporation, accounted for approximately 15.8%, 16.0% and 15.8% of the Company’s total cash rental income for the years ended December 31, 2011, 2010 and 2009, respectively. Cash rental income from Microsoft Corporation was approximately $13,494, $13,179 and $12,873 for the years ended December 31, 2011, 2010 and 2009, respectively. Future minimum rents from this tenant are approximately $36,920. One other tenant, Apple, Inc., accounted for approximately 13.8%, 11.3% and 9.4% of the Company’s total cash rental income for the years ended December 31, 2011, 2010 and 2009, respectively. During 2011, 12 of the Company’s total tenants relocated or ceased operations.

New Accounting Pronouncements

There are currently no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial condition and results of operations in future periods.

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Note 22 - Subsequent Events

12 Months Ended

Dec. 31, 2011

Note 22 - Subsequent Events Disclosure

Note 22 - Subsequent Events

22.     SUBSEQUENT EVENTS

On January 5, 2012, the Company paid dividends of $0.13 per share of common stock to all common stockholders of record as of December 30, 2011. On the same date, the operating partnerships paid a distribution of $0.13 per O.P. Unit to all O.P. Unit holders. Aggregate dividends and distributions amounted to approximately $13,687.

On January 9, 2012, the Company disposed of three R&D properties located at 1680-1690 McCandless Drive, 1740-1768 McCandless Drive and 1810-1830 McCandless Drive in Milpitas, California consisting of approximately 165,000 rentable square feet. A total net gain of approximately $8,350 will be recognized and classified as discontinued operations on the total sales price of $21,780. The buyer issued an unsecured promissory note to the Company in the amount of $18,780 with an interest rate of 0% per annum. The total sales price encompasses the sum of the following amounts: 1) the down payment price of $3,000; 2) yearly payments of $3,000 on the anniversary of the closing date for four years; and 3) on the fifth year anniversary of the closing date, the buyer will pay the amount remaining of the unpaid portion of the total sales price.

On February 1, 2012, the Company acquired three vacant R&D buildings located at 5901, 5921 and 5961 Optical Court in San Jose, California from the Berg Group consisting of approximately 202,500 rentable square feet. The total acquisition price for these properties was $18,000. The Company also acquired approximately ten acres of raw land at Hellyer Avenue and Embedded Way for approximately $5,313 and nine acres of raw land at Hellyer Avenue and Piercy Road for approximately $4,877 from the Berg Group. The combined purchase price for the three R&D buildings and raw land totaled approximately $28,190. The Company acquired these properties by offsetting the purchase price with approximately $9,217, the amount the Berg Group owes to the Company from the outcome of the Hellyer Avenue Limited Partnership litigation and approximately $7,494, the amount the Berg Group is committed to pay toward the construction of an R&D building in connection with the Company’s 2001 acquisition of 245 Caspian Drive in Sunnyvale, California. The Company issued an unsecured short-term note payable for the remaining amount of approximately $11,479 with an interest rate of LIBOR plus 1.75%, which is due July 15, 2012, with an option to extend another six months. As of March 13, 2012, the note payable had been fully repaid.

On February 14, 2012, the Company disposed of three R&D properties located at 1625-1657 McCandless Drive, 1725-1745 McCandless Drive and 1815-1845 McCandless Drive in Milpitas, California consisting of approximately 112,000 rentable square feet. Only 36.04% of property 1815-1845 McCandless Drive was sold in this phase and the remaining 63.96% will be sold in the second phase at a later date. A total net gain of approximately $4,434 will be recognized and classified as discontinued operations on the total sales price of $13,613. The Company received net proceeds of approximately $13,547 in cash.

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Note 21 - Supplemental Financial Information (Unaudited)

12 Months Ended

Dec. 31, 2011

Note 21 - Supplemental Financial Information (Unaudited) Disclosure

Note 21 - Supplemental Financial Information (Unaudited)

21.     SUPPLEMENTAL FINANCIAL INFORMATION  (Unaudited)

Quarterly financial information for the year ended December 31, 2011 (1) is as follows:

	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	(Unaudited)
	(dollars in thousands)
Rental income	$	21,723	$	20,354	$	20,889	$	20,608
Operating income	$	15,760	$	13,368	$	13,407	$	14,950
Net income	$	10,395	$	8,062	$	8,031	$	10,403
Net income available to common stockholders	$	2,400	$	1,879	$	1,875	$	3,121
Per share data:
Basic net income per share	$	0.11	$	0.08	$	0.08	$	0.14
Diluted net income per share	$	0.11	$	0.08	$	0.08	$	0.14
Weighted average shares of common stock (basic)		22,288,103		22,495,605		22,584,770		22,585,110
Weighted average shares of common stock (diluted)		22,405,276		22,756,006		22,878,981		22,013,187

Quarterly financial information for the year ended December 31, 2010 (1) is as follows:

	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	(Unaudited)
	(dollars in thousands)
Rental income	$	20,635	$	20,489	$	20,426	$	19,487
Operating income	$	13,842	$	13,306	$	11,381	$	10,522
Net income	$	10,675	$	10,563	$	6,075	$	5,153
Net income available to common stockholders	$	2,458	$	2,460	$	1,370	$	2,185
Per share data:
Basic net income per share	$	0.11	$	0.11	$	0.06	$	0.10
Diluted net income per share	$	0.11	$	0.11	$	0.06	$	0.10
Weighted average shares of common stock (basic)		21,881,189		21,957,654		21,976,679		22,076,694
Weighted average shares of common stock (diluted)		22,056,805		22,123,527		22,109,391		22,198,946

(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.

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Schedule III - Real Estate and Accumulated Depreciation and Amortization

12 Months Ended

Dec. 31, 2011

Schedule III - Real Estate and Accumulated Depreciation and Amortization Disclosure

Schedule III - Real Estate and Accumulated Depreciation and Amortization

Schedule III

Real Estate and Accumulated Depreciation and Amortization

December 31, 2011

(dollars in thousands)

					Initial Cost						Total Cost
Property Name	City		December 31, 2011 Encumbrances		Land		Buildings and Improvements		Cost Subsequent to Construction/ Acquisition		Land		Buildings and Improvements		Total		Accumulated Depreciation & Amortization		Date of Acquisition		Depreciable Life
5300-5350 Hellyer Avenue	San Jose	C	$	7,139	$	5,742	$	11,442			$	5,742	$	11,442	$	17,184	$	3,325		05/00	M
10401-10411 Bubb Road	Cupertino	A				633		3,078				633		3,078		3,711		1,041		07/98	M
45365 Northport Loop	Fremont					2,447		5,711	$	11		2,447		5,722		8,169		1,618		10/00	M
45738 Northport Loop	Fremont	F				891		4,338		5		891		4,343		5,234		1,469		07/98	M
4050 Starboard Drive	Fremont	F				1,329		6,467		8		1,329		6,475		7,804		2,187		07/98	M
3501 W. Warren Ave/Fremont Blvd	Fremont					1,866		9,082		1,366		1,866		10,448		12,314		4,424		07/98	M
48800 Milmont Blvd	Fremont					1,013		4,932				1,013		4,932		5,945		1,666		07/98	M
4750 Patrick Henry Drive	Santa Clara	H				1,604		7,805		405		1,604		8,210		9,814		3,051		07/98	M
3520 Bassett Street	Santa Clara	D				1,104		5,371				1,104		5,371		6,475		1,813		07/98	M
3530 Bassett Street	Santa Clara	B,D				849		4,133				849		4,133		4,982		1,396		07/98	M
5850-5870 Hellyer Avenue	San Jose	F				2,787		6,502		173		2,787		6,675		9,462		2,275		11/98	M
5750 Hellyer Avenue	San Jose	F				3,266		3,354		2,798		3,266		6,152		9,418		2,603		08/01	M
800 Embedded Way	San Jose	L				1,794		-				1,794		-		1,794		-		03/00	-
5500 Hellyer Avenue	San Jose	F				4,735		12,485		1,545		4,735		14,030		18,765		4,044		02/01	M
5550 Hellyer Avenue	San Jose	F				3,261		3,478		3,755		3,261		7,233		10,494		3,505		06/01	M
5400 Hellyer Avenue	San Jose					3,238		5,007		215		3,238		5,222		8,460		1,657		07/00	M
5325 Hellyer Avenue	San Jose	H				4,684		10,230		40		4,684		10,270		14,954		2,862		01/01	M
875 Embedded Way	San Jose	H				4,866		5,822		2,529		4,866		8,351		13,217		2,530		01/02	M
5905-5965 Silver Creek Valley Road	San Jose					8,437		17,316		46		8,437		17,362		25,799		4,567		07/01	M
5905-5965 Silver Creek Valley Road	San Jose					3,438		2,727				3,438		2,727		6,165		699		10/01	M
5845 Hellyer Avenue	San Jose					6,090		5,029				6,090		5,029		11,119		548		09/07	M
855 Embedded Way	San Jose					3,289		6,521		60		3,289		6,581		9,870		1,799		05/01	M
1065-1105 La Avenida Street	Mountain View					46,832		109,275		65		46,832		109,340		156,172		34,850		04/99	M
1040-1050 La Avenida Street	Mountain View					3,652		200				3,652		200		3,852		200		01/10	M
1875 Charleston Road	Mountain View	N				-		1,870		421		-		2,291		2,291		302		04/06	M
1750 Automation Parkway	San Jose	G				4,789		11,174		315		4,789		11,489		16,278		3,590		07/99	M
1756 Automation Parkway	San Jose	G				4,378		10,216		704		4,378		10,920		15,298		3,407		01/00	M
1762 Automation Parkway	San Jose	G				4,804		12,224		1,332		4,804		13,556		18,360		4,439		04/00	M
1768 Automation Parkway	San Jose	H				8,195		19,121		218		8,195		19,339		27,534		5,517		12/00	M
255 Caspian Drive	Sunnyvale	F				3,491		7,160		1,658		3,491		8,818		12,309		3,152		04/00	M
245 Caspian Drive	Sunnyvale					5,894		-				5,894		-		5,894		-		04/01	-
5941 Optical Court	San Jose	Q				1,808		9,017		31		1,808		9,048		10,856		798		7/11	M
5981 Optical Court	San Jose	F				4,054		14,938		298		4,054		15,236		19,290		3,514		01/08	M
5970 Optical Court	San Jose	F				2,758		8,395				2,758		8,395		11,153		1,679		12/03	M
5900 Optical Court	San Jose					3,634		12,677		723		3,634		13,400		17,034		3,094		07/02	M
2630 Orchard Parkway	San Jose					2,932		5,863		22		2,932		5,885		8,817		1,464		03/02	M
2610 Orchard Parkway	San Jose	K				2,615		5,231				2,615		5,231		7,846		1,286		03/02	M
55 West Trimble Road	San Jose	K				4,435		8,869				4,435		8,869		13,304		2,181		03/02	M
2001 Walsh Avenue	Santa Clara	E,G,J				4,610		3,887				4,610		3,887		8,497		855		04/03	M
2880 Scott Blvd	Santa Clara	E,H,J				14,501		22,555		471		14,501		23,026		37,527		5,133		04/03	M
2890 Scott Blvd	Santa Clara	E,H,J				3,081		9,696		25		3,081		9,721		12,802		2,140		04/03	M
2770-2800 Scott Blvd	Santa Clara	E,H				7,138		7,075		170		7,138		7,245		14,383		1,708		04/03	M
2300 Central Expressway	Santa Clara	E,G,J				2,390		2,459		50		2,390		2,509		4,899		566		04/03	M
2220 Central Expressway	Santa Clara	E,G,J				3,305		3,427		816		3,305		4,243		7,548		1,421		04/03	M
2330 Central Expressway	Santa Clara	E,G				3,673		3,932		1,237		3,673		5,169		8,842		1,674		04/03	M
233 South Hillview Drive	Milpitas	F,O				3,335		8,701				3,335		8,701		12,036		1,269		03/06	M
2251 Lawson Lane	Santa Clara					1,952		9,498		622		1,952		10,120		12,072		3,589		07/98	M
1230 East Arques	Sunnyvale	F				540		2,628		39		540		2,667		3,207		930		07/98	M
1250 East Arques	Sunnyvale	F				1,335		6,499				1,335		6,499		7,834		2,194		07/98	M
20400 Mariani Avenue	Cupertino					1,670		8,125		946		1,670		9,071		10,741		3,562		07/98	M
10500 De Anza Blvd	Cupertino					7,666		37,304				7,666		37,304		44,970		12,594		07/98	M
20605-20705 Valley Green Drive	Cupertino	G				3,490		16,984				3,490		16,984		20,474		5,736		07/98	M
10300 Bubb Road	Cupertino	F				635		3,090				635		3,090		3,725		1,044		07/98	M
10440 Bubb Road	Cupertino					434		2,112		114		434		2,226		2,660		829		07/98	M
10460 Bubb Road	Cupertino	H				994		4,838		1,279		994		6,117		7,111		2,199		07/98	M

1135 Kern Avenue	Sunnyvale					407		1,982				407		1,982		2,389		672	07/98	M
450 National Avenue	Mountain View					611		2,973		95		611		3,068		3,679		1,097	07/98	M
3301 Olcott Street	Santa Clara	F				1,846		8,984		1,878		1,846		10,862		12,708		3,317	07/98	M
2800 Bayview Avenue	Fremont					1,070		5,205		60		1,070		5,265		6,335		1,819	07/98	M
5521 Hellyer Avenue	San Jose					4,534		9,650		230		4,534		9,880		14,414		2,116	02/05	M
6850 Santa Teresa Blvd	San Jose	H				377		1,836		819		377		2,655		3,032		1,143	07/98	M
6810 Santa Teresa Blvd	San Jose	H				2,567		5,991		844		2,567		6,835		9,402		2,615	03/99	M
140-160 Great Oaks Blvd	San Jose					1,402		6,822		754		1,402		7,576		8,978		2,824	07/98	M
6541 Via del Oro/6385 San Ignacio	San Jose	G				1,039		5,057		163		1,039		5,220		6,259		1,825	07/98	M
6311-6351 San Ignacio Avenue	San Jose	F				6,246		30,396		170		6,246		30,566		36,812		10,435	07/98	M
6320-6360 San Ignacio Avenue	San Jose	G				2,616		12,732		439		2,616		13,171		15,787		4,546	07/98	M
75 E. Trimble Road/2610 N. First St	San Jose					3,477		16,919		1,457		3,477		18,376		21,853		6,014	07/98	M
2904 Orchard Parkway	San Jose	F,P				4,704		11,992				4,704		11,992		16,696		1,901	02/08	M
3236 Scott Blvd	Santa Clara	F				1,234		6,005				1,234		6,005		7,239		2,029	07/98	M
1212 Bordeaux Lane	Sunnyvale	F				2,250		10,948				2,250		10,948		13,198		3,698	07/98	M
1500-1810 McCandless Drive	Milpitas					11,507		54,096		1,306		11,507		55,402		66,909		18,887	07/98	M
1600 Memorex Drive	Santa Clara	I				1,221		5,940		11		1,221		5,951		7,172		1,993	07/98	M
1688 Richard Avenue	Santa Clara	I				1,248		2,913		6		1,248		2,919		4,167		988	09/98	M
1700 Richard Avenue	Santa Clara	I				1,727		4,030				1,727		4,030		5,757		1,254	08/99	M
Morgan Hill Land	Morgan Hill					25,543		-				25,543		-		25,543		-	03/07	-
Morgan Hill Land	Morgan Hill					2,297		-				2,297		-		2,297		-	04/07	-
300 Montague Expressway	Milpitas					2,609		2,499				2,609		2,499		5,108		276	04/07	M
337 Trade Zone Blvd	Milpitas					2,264		2,168				2,264		2,168		4,432		239	04/07	M
324-368 Montague Expressway	Milpitas					2,968		2,843				2,968		2,843		5,811		314	04/07	M
3506-3510 Bassett Street	Santa Clara	D				943		4,591		182		943		4,773		5,716		1,698	07/98	M
3540-3544 Bassett Street	Santa Clara	F,D				1,565		7,616		261		1,565		7,877		9,442		2,692	07/98	M
3550 Bassett Street	Santa Clara	F,D				1,079		5,251		33		1,079		5,284		6,363		1,809	07/98	M
3560 Bassett Street	Santa Clara	F,D				1,075		5,233		8		1,075		5,241		6,316		1,776	07/98	M
3570-3580 Bassett Street	Santa Clara	F,D				1,075		5,233				1,075		5,233		6,308		1,769	07/98	M
Hartford Loans		F		143,497
Northwestern Mutual Life Insurance Company		G		69,034
Allianz Loans		H		118,635
Heritage Bank of Commerce Line of Credit		I		3,305
Total (R)			$	341,610	$	323,884	$	769,775	$	33,228	$	323,884	$	803,003	$	1,126,887	$	245,741
Properties Held For Sale:
1500-1810 McCandless Drive	Milpitas				$	9,569	$	45,970			$	9,569	$	45,970	$	55,539	$	15,700	07/98
300 Montague Expressway	Milpitas					2,609		2,499				2,609		2,499		5,108		276	04/07
337 Trade Zone Blvd	Milpitas					2,264		2,168				2,264		2,168		4,432		240	04/07
324-368 Montague Expressway	Milpitas					2,968		2,843				2,968		2,843		5,811		314	04/07
Total					$	17,410	$	53,480			$	17,410	$	53,480	$	70,890	$	16,530

(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.

(C) 50% 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 $143,497 Hartford loans - full amount of loan shown at the bottom of the schedule.

(G) Encumbered by the $69,034 Northwestern Mutual Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.

(H) Encumbered by the $118,635 Allianz loans - full amount of loan shown at the bottom of the schedule.

(I) Encumbered by the $3,305 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 were 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 were 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. The amount was fully amortized in 2010 and the asset cost and its related accumulated amortization were removed from the accounts.

(O) Purchase price allocated to real estate related intangible assets amounted to $1,374. The amount was fully amortized in 2011 and the asset cost and its related accumulated amortization were removed from the accounts.

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

(Q) Purchase price allocated to real estate related intangible assets amounted to $2,440.

(R) These real estate and accumulated depreciation totals are inclusive of properties held for sale.

Schedule III

Real Estate and Accumulated Depreciation and Amortization

December 31, 2010

(dollars in thousands)

					Initial Cost						Total Cost
Property Name	City		December 31, 2010 Encumbrances		Land		Buildings and Improvements		Cost Subsequent to Construction/ Acquisition		Land		Buildings and Improvements		Total		Accumulated Depreciation & Amortization		Date of Acquisition	Depreciable Life
5300-5350 Hellyer Avenue	San Jose	C	$	7,721	$	5,742	$	11,442			$	5,742	$	11,442	$	17,184	$	3,039	05/00	M
10401-10411 Bubb Road	Cupertino	A				633		3,078				633		3,078		3,711		963	07/98	M
45365 Northport Loop	Fremont					2,447		5,711	$	11		2,447		5,722		8,169		1,475	10/00	M
45738 Northport Loop	Fremont	F				891		4,338		5		891		4,343		5,234		1,360	07/98	M
4050 Starboard Drive	Fremont	F				1,329		6,467		8		1,329		6,475		7,804		2,025	07/98	M
3501 W. Warren Ave/Fremont Blvd	Fremont					1,866		9,082		1,366		1,866		10,448		12,314		4,166	07/98	M
48800 Milmont Blvd	Fremont					1,013		4,932				1,013		4,932		5,945		1,543	07/98	M
4750 Patrick Henry Drive	Santa Clara	H				1,604		7,805		405		1,604		8,210		9,814		2,855	07/98	M
3520 Bassett Street	Santa Clara	D				1,104		5,371				1,104		5,371		6,475		1,679	07/98	M
3530 Bassett Street	Santa Clara	B,D				849		4,133				849		4,133		4,982		1,293	07/98	M
5850-5870 Hellyer Avenue	San Jose	F				2,787		6,502		131		2,787		6,633		9,420		2,086	11/98	M
5750 Hellyer Avenue	San Jose	F				3,266		3,354		2,798		3,266		6,152		9,418		2,173	08/01	M
800 Embedded Way	San Jose	L				1,794		-				1,794		-		1,794		-	03/00	-
5500 Hellyer Avenue	San Jose	F				4,735		12,485		1,545		4,735		14,030		18,765		3,534	02/01	M
5550 Hellyer Avenue	San Jose	F				3,261		3,478		3,755		3,261		7,233		10,494		2,659	06/01	M
5400 Hellyer Avenue	San Jose					3,238		5,007		215		3,238		5,222		8,460		1,531	07/00	M
5325 Hellyer Avenue	San Jose	H				4,684		10,230		40		4,684		10,270		14,954		2,606	01/01	M
875 Embedded Way	San Jose	H				4,866		5,822		2,529		4,866		8,351		13,217		2,068	01/02	M
5905-5965 Silver Creek Valley Road	San Jose					8,437		17,316		46		8,437		17,362		25,799		4,124	07/01	M
5905-5965 Silver Creek Valley Road	San Jose					3,438		2,727				3,438		2,727		6,165		631	10/01	M
5845 Hellyer Avenue	San Jose					6,090		5,029				6,090		5,029		11,119		419	09/07	M
855 Embedded Way	San Jose					3,289		6,521		60		3,289		6,581		9,870		1,640	05/01	M
1065-1105 La Avenida Street	Mountain View					46,832		109,275		65		46,832		109,340		156,172		32,116	04/99	M
1040-1050 La Avenida Street	Mountain View					3,652		200				3,652		200		3,852		100	01/10	M
1875 Charleston Road	Mountain View	N				-		2,615				-		2,615		2,615		967	04/06	M
1750 Automation Parkway	San Jose	G				4,789		11,174		315		4,789		11,489		16,278		3,303	07/99	M
1756 Automation Parkway	San Jose	G				4,378		10,216		704		4,378		10,920		15,298		3,083	01/00	M
1762 Automation Parkway	San Jose	G				4,804		12,224		1,332		4,804		13,556		18,360		3,947	04/00	M
1768 Automation Parkway	San Jose	H				8,195		19,121		218		8,195		19,339		27,534		5,039	12/00	M
255 Caspian Drive	Sunnyvale	F				3,491		7,160		1,658		3,491		8,818		12,309		2,849	04/00	M
245 Caspian Drive	Sunnyvale					5,894		-				5,894		-		5,894		-	04/01	-
5981 Optical Court	San Jose	F				4,054		14,938		298		4,054		15,236		19,290		2,634	01/08	M
5970 Optical Court	San Jose	F				2,758		8,395				2,758		8,395		11,153		1,469	12/03	M
5900 Optical Court	San Jose					3,634		12,677		83		3,634		12,760		16,394		2,777	07/02	M
2630 Orchard Parkway	San Jose					2,932		5,863		22		2,932		5,885		8,817		1,317	03/02	M
2610 Orchard Parkway	San Jose	K				2,615		5,231				2,615		5,231		7,846		1,156	03/02	M
55 West Trimble Road	San Jose	K				4,435		8,869				4,435		8,869		13,304		1,959	03/02	M
2001 Walsh Avenue	Santa Clara	E,G,J				4,610		3,887				4,610		3,887		8,497		758	04/03	M
2880 Scott Blvd	Santa Clara	E,H,J				14,501		22,555		471		14,501		23,026		37,527		4,522	04/03	M
2890 Scott Blvd	Santa Clara	E,H,J				3,081		9,696		25		3,081		9,721		12,802		1,894	04/03	M
2770-2800 Scott Blvd	Santa Clara	E,H				7,138		7,075		170		7,138		7,245		14,383		1,502	04/03	M
2300 Central Expressway	Santa Clara	E,G,J				2,390		2,459		50		2,390		2,509		4,899		494	04/03	M
2220 Central Expressway	Santa Clara	E,G,J				3,305		3,427		816		3,305		4,243		7,548		1,242	04/03	M
2330 Central Expressway	Santa Clara	E,G				3,673		3,932		1,062		3,673		4,994		8,667		1,506	04/03	M
233 South Hillview Drive	Milpitas	F,O				3,335		10,076				3,335		10,076		13,411		2,358	03/06	M
2251 Lawson Lane	Santa Clara					1,952		9,498		622		1,952		10,120		12,072		3,227	07/98	M
1230 East Arques	Sunnyvale	F				540		2,628		39		540		2,667		3,207		864	07/98	M
1250 East Arques	Sunnyvale	F				1,335		6,499				1,335		6,499		7,834		2,032	07/98	M
20400 Mariani Avenue	Cupertino					1,670		8,125		946		1,670		9,071		10,741		3,176	07/98	M
10500 De Anza Blvd	Cupertino					7,666		37,304				7,666		37,304		44,970		11,661	07/98	M
20605-20705 Valley Green Drive	Cupertino	G				3,490		16,984				3,490		16,984		20,474		5,311	07/98	M
10300 Bubb Road	Cupertino	F				635		3,090				635		3,090		3,725		967	07/98	M
10440 Bubb Road	Cupertino					434		2,112		114		434		2,226		2,660		777	07/98	M
10460 Bubb Road	Cupertino	H				994		4,838		1,279		994		6,117		7,111		2,049	07/98	M

1135 Kern Avenue	Sunnyvale					407		1,982				407		1,982		2,389		623	07/98	M
450 National Avenue	Mountain View					611		2,973		95		611		3,068		3,679		992	07/98	M
3301 Olcott Street	Santa Clara	F				1,846		8,984		1,876		1,846		10,860		12,706		2,901	07/98	M
2800 Bayview Avenue	Fremont					1,070		5,205		60		1,070		5,265		6,335		1,689	07/98	M
5521 Hellyer Avenue	San Jose					4,534		9,650		112		4,534		9,762		14,296		1,768	02/05	M
6850 Santa Teresa Blvd	San Jose	H				377		1,836		819		377		2,655		3,032		1,073	07/98	M
6810 Santa Teresa Blvd	San Jose	H				2,567		5,991		772		2,567		6,763		9,330		2,350	03/99	M
140-160 Great Oaks Blvd	San Jose					1,402		6,822		754		1,402		7,576		8,978		2,641	07/98	M
6541 Via del Oro/6385 San Ignacio	San Jose	G				1,039		5,057		163		1,039		5,220		6,259		1,671	07/98	M
6311-6351 San Ignacio Avenue	San Jose	F				6,246		30,396		170		6,246		30,566		36,812		9,675	07/98	M
6320-6360 San Ignacio Avenue	San Jose	G				2,616		12,732		439		2,616		13,171		15,787		4,219	07/98	M
75 E. Trimble Road/2610 N. First St	San Jose					3,477		16,919		516		3,477		17,435		20,912		5,378	07/98	M
2904 Orchard Parkway	San Jose	F,P				4,704		11,992				4,704		11,992		16,696		1,405	02/08	M
3236 Scott Blvd	Santa Clara	F				1,234		6,005				1,234		6,005		7,239		1,879	07/98	M
1212 Bordeaux Lane	Sunnyvale	F				2,250		10,948				2,250		10,948		13,198		3,424	07/98	M
1350-1810 McCandless Drive	Milpitas					12,259		57,770		1,306		12,259		59,076		71,335		18,947	07/98	M
1600 Memorex Drive	Santa Clara	I				1,221		5,940		11		1,221		5,951		7,172		1,844	07/98	M
1688 Richard Avenue	Santa Clara	I				1,248		2,913		6		1,248		2,919		4,167		915	09/98	M
1700 Richard Avenue	Santa Clara	I				1,727		4,030				1,727		4,030		5,757		1,154	08/99	M
Morgan Hill Land	Morgan Hill					25,543		-				25,543		-		25,543		-	03/07	-
Morgan Hill Land	Morgan Hill					2,297		-				2,297		-		2,297		-	04/07	-
300 Montague Expressway	Milpitas					2,609		2,499				2,609		2,499		5,108		229	04/07	M
337 Trade Zone Blvd	Milpitas					2,264		2,168				2,264		2,168		4,432		199	04/07	M
324-368 Montague Expressway	Milpitas					2,968		2,843				2,968		2,843		5,811		261	04/07	M
3506-3510 Bassett Street	Santa Clara	D				943		4,591		182		943		4,773		5,716		1,579	07/98	M
3540-3544 Bassett Street	Santa Clara	F,D				1,565		7,616		261		1,565		7,877		9,442		2,483	07/98	M
3550 Bassett Street	Santa Clara	F,D				1,079		5,251		33		1,079		5,284		6,363		1,678	07/98	M
3560 Bassett Street	Santa Clara	F,D				1,075		5,233		8		1,075		5,241		6,316		1,646	07/98	M
3570-3580 Bassett Street	Santa Clara	F,D				1,075		5,233				1,075		5,233		6,308		1,638	07/98	M
Hartford Loans		F		148,003
Northwestern Mutual Life Insurance Company		G		73,357
Allianz Loans		H		124,410
Heritage Bank of Commerce Line of Credit		I		-
Total (Q)			$	353,491	$	322,828	$	766,552	$	30,786	$	322,828	$	797,338	$	1,120,166	$	225,186
Property Held For Sale:
1425-1455 McCandless Drive	Milpitas				$	752	$	3,674			$	752	$	3,674	$	4,426	$	1,159	07/98

(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.

(C) 50% of this property’s ownership is held by an affiliated party since September 2000.

(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 $148,003 Hartford loans - full amount of loan shown at the bottom of the schedule.

(G) Encumbered by the $73,357 Northwestern Mutual Life Insurance Company loan - full amount of loan shown at the bottom of the schedule.

(H) Encumbered by the $124,410 Allianz loans - full amount of loan shown at the bottom of the schedule.

(I) Encumbered by the $0 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. The amount was fully amortized in 2010 and the asset cost and its related accumulated amortization were removed from the accounts.

(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.

(Q) These real estate and accumulated depreciation totals are inclusive of a property held for sale.

NOTE TO SCHEDULE III

December 31, 2011, 2010 and 2009

(dollars in thousands)

1. Reconciliation of real estate and accumulated depreciation and amortization:
	2011 (a)			2010 (a)			2009
Investments in properties:
Balance at beginning of year	$	1,120,166		$	1,123,800		$	1,123,622
Additions		13,267			6,693			178
Dispositions		(4,426	)		(10,327	)		-
Reclassification		(2,119	)		-			-
Balance at end of year	$	1,126,888		$	1,120,166		$	1,123,800
Accumulated depreciation and amortization:
Balance at beginning of year	$	225,186		$	204,153		$	180,043
Additions		23,833			23,751			24,110
Dispositions		(1,159	)		(2,718	)		-
Reclassification		(2,119	)		-			-
Balance at end of year	$	245,741		$	225,186		$	204,153
Net investments in properties	$	881,147		$	894,980		$	919,647

(a) The years 2011 and 2010 amounts are inclusive of properties held for sale.

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Note 1 - Organizations and Formation of the Company

12 Months Ended

Dec. 31, 2011

Note 1 - Organizations and Formation of the Company Disclosure

Note 1 - Organizations and Formation of the Company

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. In late December 2011, the Company formed two additional operating partnerships and transferred certain R&D properties from two current operating partnerships into the two new operating partnerships through two separate partnership division transactions. The two transactions changed the nominal ownership of title to certain properties but did not modify the economic interests or rights of the Company or the limited partners in the operating partnerships. The Company is the sole general partner of the two new operating partnerships. There was no issuance of common shares associated with these transactions, and the number of O.P. Units issued in each of the new operating partnerships was fully offset by the cancellation of the same number O.P. Units of each respective predecessor operating partnership.

As of December 31, 2011, the Company owned a controlling general partner interest of 25.74%, 21.86%, 16.32%, 12.53%, 21.86% and 16.32% in Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II, Mission West Properties, L.P. III, Mission West Properties, L.P. IV and Mission West Properties, L.P. V, respectively, for a 21.36% 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, 2011, 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.

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Investments in real estate:
Land	$ 306,474	$ 322,076
Buildings and improvements	745,962	790,424
Real estate related intangible assets	3,561	3,240
Total investments in properties	1,055,997	1,115,740
Accumulated depreciation and amortization	(229,211)	(224,027)
Assets held for sale, net	54,361	3,267
Net investments in properties	881,147	894,980
Investment in unconsolidated joint venture	3,557	3,830
Net investments in real estate	884,704	898,810
Cash and cash equivalents		3,988
Restricted cash		6,892
Deferred rent	16,650	17,941
Other assets, net	35,133	40,653
Total assets	936,487	968,284
Liabilities:
Mortgage notes payable	331,166	345,770
Mortgage note payable (related parties)	7,139	7,721
Revolving line of credit	3,305
Interest payable	1,606	1,659
Prepaid rent	5,836	6,526
Dividends and distributions payable	13,687	15,793
Accounts payable and accrued expenses	16,344	16,239
Security deposits	4,317	4,605
Total liabilities	383,400	398,313
Commitments and contingencies (Note 16)
Stockholders' equity :
Preferred stock, $.001 par value, 20,000,000 shares authorized, none issued or outstanding
Common stock, $.001 par value, 200,000,000 shares authorized, 22,586,020 and 22,135,770 shares issued and outstanding at December 31, 2011 and 2010	23	22
Additional paid-in capital	175,900	172,568
Distributions in excess of accumulated earnings	(32,962)	(30,520)
Total stockholders' equity	142,961	142,070
Noncontrolling interests in operating partnerships	410,126	427,901
Total equity	553,087	569,971
Total liabilities and equity	$ 936,487	$ 968,284

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Consolidated Statements of Equity (Parentheticals) (Total Equity, USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Total Equity
Dividends declared per common share and O.P. Unit	$ 0.52	$ 0.60	$ 0.65

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Note 15 - Supplemental Cash Flow Information

12 Months Ended

Dec. 31, 2011

Note 15 - Supplemental Cash Flow Information Disclosure

Note 15 - Supplemental Cash Flow Information

15.     SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was approximately $20,783, $20,736 and $22,507 for the years ended December 31, 2011, 2010 and 2009, respectively.

Amounts of approximately $13,687, $15,793 and $15,791 were accrued for dividends and distributions to common stockholders and O.P. Unit holders for the years ended December 31, 2011, 2010 and 2009, respectively.

Amounts of approximately $41,410, $46,048 and $54,154 were paid to the Berg Group for distributions declared to O.P. Unit holders during the years ended December 31, 2011, 2010 and 2009, respectively.

For the years ended December 31, 2011, 2010 and 2009, 450,250, 254,700 and 2,122,000 O.P. Units were exchanged for 450,250, 254,700 and 2,122,000 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 $3,276, $1,734 and $15,844 for the years ended December 31, 2011, 2010 and 2009, respectively, based on the market closing price on the day of the transactions.

In connection with the property disposition of 1425-1455 McCandless Drive in 2011, the Company received a promissory note from the buyer in the amount of $3,660 with an interest rate of 6.00% per annum. The principal amount of the note, together with accrued interest, will be due and payable on October 30, 2012.

In connection with the property disposition of 1325-1375 McCandless Drive in 2010, the Company received a promissory note from the buyer in the amount of $7,123 with an interest rate of 3.00% per annum. The principal amount of the note, together with accrued interest, was due and payable on October 30, 2011.

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Note 17 - Real Estate Asset Held for Sale and Discontinued Operations

12 Months Ended

Dec. 31, 2011

Note 17 - Real Estate Asset Held for Sale and Discontinued Operations Disclosure

Note 17 - Real Estate Asset Held for Sale and Discontinued Operations

17.     REAL ESTATE ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

The Company follows the accounting provisions 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, 2011, 2010 and 2009. 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.

In 2011, the Company sold one R&D property for a total sales price of approximately $7,320 resulting in a net gain of approximately $3,891.

In 2010, the Company sold one R&D property for a total sales price of approximately $14,123 resulting in a net gain of approximately $6,199.

As of December 31, 2011, there were 13 properties under contract to be sold which would qualify as assets held for sale.

Results of operations for these properties for the years ended December 31, 2011, 2010 and 2009 are as follows:

	Year Ended December 31,
	2011			2010			2009
	(dollars in thousands)
Revenues:
Rental income	$	26		$	715		$	1,063
Tenant reimbursements		(34	)		273			459
Other income		161			29			48
Total operating revenues		153			1,017			1,570
Expenses:
Property operating, maintenance and real estate taxes		1,030			1,558			1,751
Depreciation		1,004			1,629			1,682
Total operating expenses		2,034			3,187			3,433
Net loss attributable to discontinued operations		(1,881	)		(2,170	)		(1,863	)
Net gain on disposal of discontinued operations		3,891			6,199			-
Income (loss) from discontinued operations	$	2,010		$	4,029		$	(1,863	)

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash flows from operating activities:
Net income	$ 38,901	$ 36,495	$ 34,449
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	23,843	23,751	24,110
Gain from disposal of properties classified as discontinued operations	(3,891)	(6,199)
Realized and unrealized gain from restricted investment		4,067	5,011
Dividend income from restricted investment			(726)
Equity in earnings of unconsolidated joint venture	27	303	309
Distributions from unconsolidated joint venture	300	300	250
Interest earned on restricted cash		(12)	(94)
Lease termination fee income related to restricted cash	10,865	10,381	10,864
Stock-based compensation	57	160	352
Other		9
Change in operating assets and liabilities:
Proceeds from restricted investment		16,211	3,646
Deferred rent	1,291	770	(870)
Other assets	2,068	(2,158)	(4,700)
Interest payable	(53)	86	68
Security deposits	(288)	(244)	(423)
Prepaid rent	(690)	(13)	2,575
Accounts payable and accrued expenses	105	6,601	(8,109)
Net cash provided by operating activities	72,481	81,768	56,072
Cash flows from investing activities:
Improvements to investments in real estate	(2,442)	(2,841)	(178)
Purchase of office equipment		(39)
Net proceeds from sale of properties	3,497	6,686
Acquisition of properties	(10,825)	(3,853)
Decrease (increase) in restricted cash	6,803	(6,691)	(100)
Proceeds received from note receivable	7,123
Net cash provided by (used in) investing activities	4,156	(6,738)	(278)
Cash flows from financing activities:
Proceeds from mortgage loan payable		40,000
Principal payments on mortgage notes payable	(14,604)	(13,048)	(12,090)
Principal payments on mortgage notes payable (related parties)	(582)	(540)	(500)
Proceeds from note payable (related parties)	18,852	53,025	39,420
Payment on note payable (related parties)	(18,852)	(62,350)	(39,420)
Proceeds from note payable			22,000
Payment on note payable	(10,776)	(10,381)
Net borrowings (repayments) on revolving line of credit	3,305	(14,466)	1,387
Debt issuance costs	(21)	(457)
Net proceeds from exercise of stock options		67
Distributions paid to noncontrolling interests	(45,846)	(50,709)	(50,775)
Dividends paid to common stockholders	(12,101)	(13,169)	(14,830)
Net cash used in financing activities	(80,625)	(72,028)	(54,808)
Net (decrease) increase in cash and cash equivalents	(3,988)	3,002	986
Cash and cash equivalents, beginning of year	3,988	986
Cash and cash equivalents, end of year		$ 3,988	$ 986

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Consolidated Balance Sheets (Parentheticals) (USD $)	Dec. 31, 2011	Dec. 31, 2010
Stockholders' equity :
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	20,000,000	20,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	22,586,020	22,135,770
Common stock, shares outstanding	22,586,020	22,135,770

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Note 10 - Equity-based Compensation and Retirement Investment Plans

12 Months Ended

Dec. 31, 2011

Note 10 - Equity-based Compensation and Retirement Investment Plans Disclosure

Note 10 - Equity-based Compensation and Retirement Investment Plans

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 647,000 shares have been transferred as of December 31, 2011; 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, of which 1,674,535 and 1,084,535 shares of common stock were available for future option or award grants under the 2004 Plan as of December 31, 2011 and 2010, respectively.

The Company’s stock-based compensation expense was approximately $57, $67 and $352 for the years ended December 31, 2011, 2010 and 2009, respectively.

Determining Fair Value of Stock Options

The fair value of stock options granted during the years ended December 31, 2010 and 2009 were determined by the Company using the Black-Scholes option pricing model and assumptions of certain components within the model. These components consist of the expected dividend, expected volatility, risk-free interest rate, expected term and forfeiture rate.

In April 2011, stock options to purchase 590,000 shares of common stock held by employees and directors of the Company expired.

In February 2010, stock options to purchase 171,000 shares of common stock were granted to an employee. Of this 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 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 $6.99 per share. The estimated fair value of the options granted was $0.43 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 8.58%, volatility of 22.57%, risk free rates of 2.40% and an expected life of 5.5 years. Forfeiture rate was estimated to be 0%. All options were granted at fair market value on the date of grant and were approved by the Compensation Committee of the board of directors.

In January 2009, the Compensation Committee of the board of directors approved the rescission of 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 years. Forfeiture rate was estimated to be 0%. 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 expired.

The following table shows the activity and detail for the 2004 Plan for each of the three years in the period ended December 31, 2011.

	Shares Available For Grant			Options Outstanding			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value ($ in thousands)
Balance, December 31, 2008		1,180,535			3,332,500		$	9.62		4.0	$	224
Options granted		(500,000	)		500,000		$	5.99
Options forfeited		575,000			(575,000	)	$	10.70
Balance, December 31, 2009		1,255,535			3,257,500		$	8.87		3.7	$	738
Options granted		(171,000	)		171,000		$	6.99
Options exercised		-			(10,859	)	$	6.14
Balance, December 31, 2010		1,084,535			3,417,641		$	8.79		2.8	$	554
Options forfeited		590,000			(590,000	)	$	10.00
Balance, December 31, 2011		1,674,535			2,827,641		$	8.54		2.4	$	3,678
Vested and expected to vest – December 31, 2011					2,827,641		$	8.54		2.4	$	3,678
Exercisable – December 31, 2011					2,739,319		$	8.58		2.3	$	3,678

The following table summarizes information regarding options outstanding for the 2004 Plan at December 31, 2011:

	Options Outstanding						Options Exercisable				Options Not Exercisable
Range of Exercise Prices	Options		Weighted Average Remaining Contractual Life in Years		Exercise Price		Options		Exercise Price		Options		Exercise Price
$5.99		500,000		3.17	$	5.99		481,250	$	5.99		18,750	$	5.99
$6.14		694,141		2.92	$	6.14		655,183	$	6.14		38,958	$	6.14
$6.99		171,000		4.08	$	6.99		163,875	$	6.99		7,125	$	6.99
$9.51		760,000		2.00	$	9.51		744,167	$	9.51		15,833	$	9.51
$11.36		52,500		2.58	$	11.36		44,844	$	11.36		7,656	$	11.36
$12.09		650,000		1.08	$	12.09		650,000	$	12.09		-	$	12.09
$5.99 to $12.09		2,827,641		2.36	$	8.54		2,739,319	$	8.58		88,322	$	7.23

As of December 31, 2011, total compensation cost related to unvested stock-based awards granted, but not yet recognized, was approximately $3, net of estimated forfeitures. The cost will be amortized on a straight-line basis over a weighted-average remaining period of 8.3 months. Future option grants will increase the amount of compensation expense that will be recorded.

None of the options granted are contingent upon the attainment of performance goals or subject to other restrictions. As of December 31, 2011 and 2010, “in-the-money” outstanding options to purchase 1,300,308 and 896,329 shares of common stock, respectively, were exercisable.

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.

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, receives 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 shares 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.

An initial total of 4,638,089 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 December 31, 2011, 2010 and 2009, the Company recognized approximately $127, $125 and $125, respectively, of expense for employer contributions made in connection with this Plan.

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Feb. 29, 2012	Jun. 30, 2011
Entity Information
Entity Registrant Name	MISSION WEST PROPERTIES INC
Entity Central Index Key	0001067419
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding		22,668,020
Entity Public Float			$ 177,454,951
Document Information
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY

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Note 11 - Net Income (Loss) Per Share

12 Months Ended

Dec. 31, 2011

Note 11 - Net Income (Loss) Per Share Disclosure

Note 11 - Net Income (Loss) Per Share

11.     NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) 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.

	Year Ended December 31,
	2011		2010		2009
	(dollars in thousands, except per share data)
Numerator:
Income from continuing operations	$	8,947	$	7,815	$	8,695
Income (loss) from discontinued operations		328		658		(304	)
Net income available to common stockholders	$	9,275	$	8,473	$	8,391
Denominator:
Weighted average shares of common stock (basic)		22,489,475		21,973,599		21,736,699
Effect of dilutive securities:
Incremental shares from assumed stock options exercise		428,077		148,125		186,405
Weighted average shares of common stock (diluted)		22,917,552		22,121,724		21,923,104
Per share data:
Basic net income (loss) per share:
Net income to common stockholders before discontinued operations	$	0.40	$	0.36	$	0.40
Discontinued operations	$	0.01	$	0.03	$	(0.01	)
Net income available to common stockholders	$	0.41	$	0.39	$	0.39
Diluted net income (loss) per share:
Net income to common stockholders before discontinued operations	$	0.39	$	0.35	$	0.39
Discontinued operations	$	0.01	$	0.03	$	(0.01	)
Net income available to common stockholders	$	0.40	$	0.38	$	0.38

Outstanding options to purchase 1,462,500 shares in 2011 and 2,223,500 shares in 2010 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 which are exchangeable at the unit holder’s option, subject to certain restrictions on conversions, for shares of common stock on a one-for-one basis have been excluded from the diluted net income per share calculation. The total number of O.P. Units outstanding at December 31, 2011, 2010 and 2009 were 82,700,015, 83,150,265 and 83,404,965, respectively.

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Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Operating revenues:
Rental income	$ 83,574	$ 81,037	$ 81,458
Tenant reimbursements	17,701	14,868	18,273
Other income, including lease terminations and settlements	3,581	2,590	3,708
Total operating revenues	104,856	98,495	103,439
Operating expenses:
Property operating and maintenance	11,174	13,020	13,432
Real estate taxes	10,980	12,084	12,678
General and administrative	2,378	2,219	2,336
Depreciation and amortization	22,839	22,122	22,428
Total operating expenses	47,371	49,445	50,874
Operating income	57,485	49,050	52,565
Other income (expenses):
Equity in earnings of unconsolidated joint venture	27	303	309
Interest and dividend income	515	102	1,309
Realized and unrealized gain from investment		4,067	5,011
Interest expense	(20,505)	(20,068)	(22,117)
Interest expense - related parties	(631)	(988)	(765)
Income from continuing operations	36,891	32,466	36,312
Discontinued operations:
Net gain on disposal of properties classified as discontinued operations	3,891	6,199
Net loss attributable to discontinued operations	(1,881)	(2,170)	(1,863)
Income (loss) from discontinued operations	2,010	4,029	(1,863)
Net income	38,901	36,495	34,449
Net income attributable to noncontrolling interests	(29,626)	(28,022)	(26,058)
Net income available to common stockholders	$ 9,275	$ 8,473	$ 8,391
Net income per share from continuing operations:
Basic	$ 0.40	$ 0.36	$ 0.40
Diluted	$ 0.39	$ 0.35	$ 0.39
Net income (loss) per share from discontinued operations:
Basic	$ 0.01	$ 0.03	$ (0.01)
Diluted	$ 0.01	$ 0.03	$ (0.01)
Net income per share to common stockholders:
Basic	$ 0.41	$ 0.39	$ 0.39
Diluted	$ 0.40	$ 0.38	$ 0.38
Weighted average shares of common stock (basic)	22,489,475	21,973,599	21,736,699
Weighted average shares of common stock (diluted)	22,917,552	22,121,724	21,923,104
Weighted average O.P. units	82,796,560	83,310,364	83,538,477

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Note 5 - Noncontrolling Interests In Operating Partnerships

12 Months Ended

Dec. 31, 2011

Note 5 - Noncontrolling Interests In Operating Partnerships Disclosure

Note 5 - Noncontrolling Interests In Operating Partnerships

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 78.64% and 79.16%, on a consolidated weighted average basis, of the ownership interests in the real estate operations of the Company as of December 31, 2011 and 2010, 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, 2011, 2010 and 2009, income associated with the noncontrolling interests held by third parties of the three consolidated joint ventures was approximately $414, $356 and $407, respectively.

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Note 4 - Stock Transactions

12 Months Ended

Dec. 31, 2011

Note 4 - Stock Transactions Disclosure

Note 4 - Stock Transactions

4.     STOCK TRANSACTIONS

As of December 31, 2011 and 2010, approximately $2,626 and $2,444 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, 2013. 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.

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 $1,000, 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 $1,000. There were no O.P. Units tendered for cash by the Company in 2011 and 2010.

There were no stock option exercises in 2011.

During the year ended December 31, 2010, stock options to purchase 10,859 shares of the Company’s common stock were exercised at $6.14 per share. Total proceeds to the Company were approximately $67.

There were no stock option exercises in 2009.

In 2011, 2010 and 2009, 450,250, 254,700 and 2,122,000 O.P. Units were exchanged for 450,250, 254,700 and 2,122,000 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.

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Note 16 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Note 16 - Commitments and Contingencies Disclosure

Note 16 - Commitments and Contingencies

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.

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, 2011.

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 the estimated fair value of these agreements is minimal. Accordingly, the Company has recorded no liabilities for these agreements as of December 31, 2011.

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 occupants of the properties, by the condition of properties in the vicinity of the properties, or by third parties unrelated to the Company.

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Note 12 - Other Income

12 Months Ended

Dec. 31, 2011

Note 12 - Other Income Disclosure

Note 12 - Other Income

12.     OTHER INCOME

Other income from continuing operations was approximately $3,581, $2,590 and $3,708 for the years ended December 31, 2011, 2010 and 2009, respectively. For the year ended December 31, 2011, management fee income, incentive to lessee adjustment, environmental remediation payment, termination fee and miscellaneous income accounted for approximately $1,009, $672, $1,434, $93 and $373, respectively, of other income. For the year ended December 31, 2010, litigation proceeds, prior tenant bankruptcy settlement, management fee income, and miscellaneous income accounted for approximately $1,285, $140, $975 and $190, respectively, of other income. 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, $969 and $352, respectively, of other income.

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Note 8 - Debt

12 Months Ended

Dec. 31, 2011

Note 8 - Debt Disclosure

Note 8 - Debt

8.     DEBT

The following table sets forth certain information regarding debt outstanding as of December 31, 2011 and 2010.

Debt Description	Collateral Properties	Balance at December 31,				Maturity Date	Interest Rate
		2011		2010
		(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	$	3,305		-	September 2013	(1)
Mortgage Notes Payable (related parties) (2) :	5300-5350 Hellyer Avenue, San Jose, CA		7,139	$	7,721	June 2013		7.65	%
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 I”)	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		104,834		108,262	October 2018		6.21	%
Hartford Life Insurance Company (4) Hartford Life and Accident Insurance Company (collectively known as the “Hartford Loan II”)	5830-5870 Hellyer Avenue, San Jose, CA 5750 Hellyer Avenue, San Jose, CA 255 Caspian Drive, Sunnyvale, CA 5970 Optical Court, San Jose, CA 3301 Olcott Street, Santa Clara, CA		38,663		39,741	September 2030		6.05	%
Northwestern Mutual Life Insurance Co. (5)	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		69,034		73,357	February 2013		5.64	%
Allianz Life Insurance Company (I) (6)	5900 Optical Court, San Jose, CA		20,269		21,233	August 2025		5.56	%
Allianz Life Insurance Company (II) (6)	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		98,366		103,177	August 2025		5.22	%
			331,166		345,770
Total		$	341,610	$	353,491

(1) The interest rate on the Heritage Bank of Commerce (“HBC”) 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, 2011 and 2010 was 4.00%. 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, 2011, 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 2030. The weighted average interest rate for the mortgage notes payable was 5.78% at December 31, 2011 and 2010.

(3) The Hartford Loan I 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 I contains certain customary covenants as defined in the loan agreement. As of December 31, 2011, the Company was in compliance with these loan covenants.

(4) The Hartford Loan II is payable in monthly installments of approximately $288, which includes principal (based upon a 20-year amortization) and interest.  Costs and fees incurred with obtaining this loan aggregated approximately $457, which were deferred and amortized over the loan period. The Hartford Loan II contains certain customary covenants as defined in the loan agreement. As of December 31, 2011, the Company was in compliance with these loan covenants.

(5) 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, 2011, the Company was in compliance with these loan covenants.

(6) 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, 2011, the Company was in compliance with these loan covenants.

During 2011, the Company issued two short-term notes payable to the Berg Group in connection with a property acquisition and quarterly dividend distributions. The interest rates on the two notes were 3.50% and LIBOR plus 1.75%, respectively, and total interest expense incurred in connection with those short-term notes payable was approximately $60. The aggregate loan amount totaled approximately $18,792. The Company repaid all of the notes and accrued interest for total repayments of approximately $18,852 to the Berg Group in 2011.

During 2010, the Company issued multiple short-term notes payable to the Berg Group in connection with quarterly dividend distributions. The interest rate on the notes was LIBOR plus 1.75%, and total interest expense incurred in connection with those short-term notes payable was approximately $375. The aggregate loan amount totaled approximately $53,025, which included accrued interest. The Company repaid all of the notes, all accrued interest and the balance outstanding at December 31, 2009 of $9,325, for total repayments of approximately $62,350 to the Berg Group in 2010.

Scheduled principal payments on debt as of December 31, 2011 are as follows:

	Total Debt (Including Related Parties)
	(dollars in thousands)
2012	$	16,080
2013		85,790
2014		12,183
2015		12,893
2016		13,645
Thereafter		201,019
Total	$	341,610

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Note 6 - Real Estate

12 Months Ended

Dec. 31, 2011

Note 6 - Real Estate Disclosure

Note 6 - Real Estate

6.     REAL ESTATE

Property Acquisitions

On July 1, 2011, the Company acquired an almost fully leased office/R&D building comprised of approximately 67,500 rentable square feet at 5941 Optical Court in San Jose, California from the Berg Group, a related party, for approximately $10,825 by paying $2,000 in cash and issuing an unsecured short-term note payable in the amount of approximately $8,825 with an interest rate of 3.50%, which was due October 31, 2011. As of December 31, 2011, the note payable had been fully repaid. The purchase price of 5941 Optical Court was allocated to long-lived assets and the value of the in-place leases. The in-place leases were valued at fair market so there were no intangible assets allocated to the above-or-below market lease value. The Company recorded approximately $2,440 of the purchase price as real estate related intangible asset in the accompanying consolidated balance sheet for the value of the in-place leases. The intangible asset will be amortized over the applicable remaining lease terms.

On January 8, 2010, the Company acquired a fully leased office/R&D building comprised of approximately 41,400 rentable square feet at 1040-1050 La Avenida Street in Mountain View, California from an unrelated party for approximately $3,853 in cash. The purchase price of 1040-1050 La Avenida Street was allocated to long-lived assets. The in-place lease was valued at fair market so there was no intangible asset allocated to above-or-below market lease value.

Property Dispositions

On October 28, 2011, the Company disposed of one R&D property located at 1425-1455 McCandless Drive in Milpitas, California consisting of approximately 39,000 rentable square feet. A total net gain of approximately $3,891 was recognized and classified as discontinued operations on the total sales price of $7,320. The buyer issued a promissory note to the Company in the amount of $3,660 with an interest rate of 6.00% per annum. The principal amount of the note, together with accrued interest, will be due and payable on October 30, 2012.

On October 28, 2010, the Company disposed of one R&D property located at 1325-1375 McCandless Drive in Milpitas, California consisting of approximately 78,000 rentable square feet. A total net gain of approximately $6,199 was recognized and classified as discontinued operations on the total sales price of $14,123. The buyer issued a promissory note to the Company in the amount of $7,123 with an interest rate of 3.00% per annum. The principal amount of the note, together with accrued interest, was due and paid on October 30, 2011.

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Note 7 - Variable Interest Entity

12 Months Ended

Dec. 31, 2011

Note 7 - Variable Interest Entity Disclosure

Note 7 - Variable Interest Entity

7.     VARIABLE INTEREST ENTITY

Effective January 1, 2010, the Company adopted the modified accounting provisions pertaining to variable interest entity (“VIE”) under ASC Topic 810 “Consolidation.” The VIE accounting provisions modify 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 provisions require 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. 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 provisions require disclosures about VIEs that a company is not required to consolidate, but in which it has a significant variable interest.

Under the provisions, 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 obligations 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, received $849 from July 2009 through June 2010, received $881 from July 2010 through June 2011 and received $915 from July 2011 through December 2011. Based upon the accounting provisions 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. The arrangement with M&M terminated on December 31, 2011, and the VIE consolidation will cease effective January 1, 2012.

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. The Company re-evaluated its interest in M&M. Based on the evaluation performed, management concluded that there is no change from its initial assessment and continues to consolidate the entity. Effective January 1, 2012, the Company will cease to consolidate M&M as a VIE because its arrangement with M&M terminated on December 31, 2011.

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Note 9 - Operating Partnership and Stockholder Distributions

12 Months Ended

Dec. 31, 2011

Note 9 - Operating Partnership and Stockholder Distributions Disclosure

Note 9 - Operating Partnership and Stockholder Distributions

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 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, 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 $1,000 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 $1,000. There were no O.P. Units tendered for cash by the Company in 2011 and 2010.

During 2011, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.52 per common share and O.P. Unit for total dividends/distributions of approximately $54,749, including $13,687 payable in January 2012. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $39,876.

During 2010, the Company, as general partner of the operating partnerships, declared quarterly dividends/distributions aggregating $0.60 per common share and O.P. Unit for total dividends/distributions of approximately $63,171, including $15,793 payable in January 2011. Total distributions attributable to O.P. Units owned by various members of the Berg Group were approximately $46,048.

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.

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Note 14 - Future Minimum Rents

12 Months Ended

Dec. 31, 2011

Note 14 - Future Minimum Rents Disclosure

Note 14 - Future Minimum Rents

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 2022, 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, 2011, excluding tenant reimbursements of expenses, are as follows:

Year	Minimum Rent
	(dollars in thousands)
2012	$	77,455
2013		74,011
2014		63,090
2015		39,656
2016		34,399
Thereafter		71,575
Total	$	360,186

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Note 19 - Fair Value of Restricted Investment In Marketable Securities

12 Months Ended

Dec. 31, 2011

Note 19 - Fair Value of Restricted Investment In Marketable Securities Disclosure

Note 19 - Fair Value of Restricted Investment In Marketable Securities

19.     FAIR VALUE OF RESTRICTED INVESTMENT IN MARKETABLE SECURITIES

In accordance with the accounting provisions 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.”

As of December 31, 2011, the Company had no restricted investment in marketable securities. The Company’s restricted investment in marketable securities on December 31, 2009, was classified as trading securities. The marketable securities are classified as Level 1 of the fair value hierarchy in accordance with the accounting provisions 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. 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.

In the second quarter of 2010, the Company sold all of its restricted investment in marketable securities for a net total of approximately $15,913. The Company realized a net cash gain of approximately $9,601, which included approximately $298 in cash dividends received during the holding period. For the year ended December 31, 2010, the Company recorded net realized and unrealized gain of approximately $4,067.

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 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 year ended December 31, 2009, the Company recorded net unrealized gain of approximately $5,011 related to the increase in fair value of the marketable securities, which was reported in unrealized gain from investment in the Company’s consolidated statement of operations.

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Consolidated Statements of Equity (USD $) In Thousands, except Share data	Common stock	Additional Paid-in Capital	Distributions in Excess of Accumulated Earnings	Total Stockholders' Equity	Noncontrolling Interests in Operating Partnerships	Total Equity
Balance at Dec. 30, 2008	$ 20	$ 154,412	$ (20,014)	$ 134,418	$ 497,485	$ 631,903
Balance (in shares) at Dec. 30, 2008	19,748,211
Net income			8,391	8,391	26,058	34,449
Dividends declared per common share and O.P. 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	15,842		15,844	(15,844)
Issuance of common stock upon O.P. Unit conversion (in shares)	2,122,000
Amortization of stock-based compensation		352		352		352
Balance at Dec. 31, 2009	22	170,606	(25,784)	144,844	452,285	597,129
Balance (in shares) at Dec. 31, 2009	21,870,211
Net income			8,473	8,473	28,022	36,495
Dividends declared per common share and O.P. Unit			(13,209)	(13,209)	(49,962)	(63,171)
Joint ventures distributions					(710)	(710)
Issuance of common stock upon O.P. Unit conversion		1,734		1,734	(1,734)
Issuance of common stock upon O.P. Unit conversion (in shares)	254,700
Amortization of stock-based compensation		161		161		161
Issuance of common stock upon option exercise		67		67		67
Issuance of common stock upon option exercise (in shares)	10,859
Balance at Dec. 31, 2010	22	172,568	(30,520)	142,070	427,901	569,971
Balance (in shares) at Dec. 31, 2010	22,135,770
Net income			9,275	9,275	29,626	38,901
Dividends declared per common share and O.P. Unit			(11,717)	(11,717)	(43,033)	(54,750)
Joint ventures distributions					(1,092)	(1,092)
Issuance of common stock upon O.P. Unit conversion	1	3,275		3,276	(3,276)
Issuance of common stock upon O.P. Unit conversion (in shares)	450,250
Amortization of stock-based compensation		57		57		57
Balance at Dec. 31, 2011	$ 23	$ 175,900	$ (32,962)	$ 142,961	$ 410,126	$ 553,087
Balance (in shares) at Dec. 31, 2011	22,586,020

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Note 3 - Deferred Rent

12 Months Ended

Dec. 31, 2011

Note 3 - Deferred Rent Disclosure

Note 3 - Deferred Rent

3.     DEFERRED RENT

The following table represents activity in the allowance against deferred rent, net for the years ended December 31, 2011, 2010 and 2009.

	Beginning Balance		Provision Against Revenue			Charge-off			Ending Balance
	(dollars in thousands)
Year ended December 31, 2011	$	250	$	(1,226	)	$	(1,226	)	$	250
Year ended December 31, 2010	$	250	$	1,245		$	1,245		$	250
Year ended December 31, 2009	$	250	$	312		$	312		$	250

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Note 20 - Income Taxes

12 Months Ended

Dec. 31, 2011

Note 20 - Income Taxes Disclosure

Note 20 - Income Taxes

20.     INCOME TAXES

In accordance with ASC Topic 740 "Income Taxes," the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that result in a material impact on the Company's financial position or results of operation. The Company recognizes the tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities. The prior three years' income tax returns are subject to review by the Internal Revenue Service. The Company will recognize potential interest and penalties related to uncertain tax positions, if any, as a component of the provision for income taxes.

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Note 13 - Related Party Transactions

12 Months Ended

Dec. 31, 2011

Note 13 - Related Party Transactions Disclosure

Note 13 - Related Party Transactions

13.     RELATED PARTY TRANSACTIONS

As of December 31, 2011, the Berg Group owned 75,769,684 O.P. Units of the total 82,700,015 O.P. Units issued and outstanding. As of December 31, 2010, the Berg Group owned 75,803,684 O.P. Units of the total 83,150,265 O.P. Units issued and outstanding. The Berg Group’s interest in the Company represents approximately 74.0% of the Company as of December 31, 2011 and 2010, assuming conversion of the O.P. Units into common shares of the Company.

Property Acquisition

In 2011, the Company acquired an almost fully leased office/R&D building comprised of approximately 67,500 rentable square feet at 5941 Optical Court in San Jose, California from the Berg Group for approximately $10,825 by paying $2,000 in cash and issuing an unsecured short-term note payable in the amount of approximately $8,825 with an interest rate of 3.50%, which was due October 31, 2011. As of December 31, 2011, the note payable had been fully repaid.

There were no property acquisitions from the Berg Group in 2010.

Debt with the Berg Group

As of December 31, 2011 and 2010, debt in the amount of approximately $7,139 and $7,721, 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 $571, $613 and $653 for the years ended December 31, 2011, 2010 and 2009, respectively.

During 2011, the Company issued two short-term notes payable to the Berg Group in connection with a property acquisition and quarterly dividend distributions. The interest rates on the two notes were 3.50% and LIBOR plus 1.75%, respectively. The aggregate loan amount totaled approximately $18,792. The Company repaid approximately $18,852 to the Berg Group, which includes accrued interest. For the year ended December 31, 2011, interest expense incurred in connection with those short-term notes payable was approximately $60.

During 2010, 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 $53,025. The Company repaid approximately $62,350 to the Berg Group, which includes accrued interest and the balance outstanding at December 31, 2009 of $9,325. For the year ended December 31, 2010, interest expense incurred in connection with those short-term notes payable was approximately $375.

Transfer of Interest in Consolidated Joint Venture to Berg Group

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.

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 of the board of directors, 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 $0.9 million, $1.0 million and $0.8 million in 2011, 2010 and 2009, respectively. As of December 31, 2011, accumulated distributions from profits of Hellyer LP totaling approximately $7.9 million were accrued and distributed to BBE. Due to the uncertainty created by the litigation over Hellyer LP, since October 2003, the Company has recorded such distributions as an account receivable from BBE, which has been included in “Other assets” on the Company’s consolidated balance sheets, with an offsetting account payable to RPC.

In September 2009, the superior court issued a final decision in the Mission West Properties, L.P. v. Republic Properties Corporation litigation and entry of judgment in favor of RPC that RPC is and at all times was a partner in Hellyer LP and was entitled to receive all past distributions from profits that were paid to BBE plus accrued interest. The Company filed an appeal. 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 million. Of this amount, $9.3 million represented the amount owed to RPC and $4.7 million represented a deposit to appeal the court’s final decision in the litigation. The Company accrued approximately $4.4 million in interest expense since September 2009 on the amount of past distributions that would be payable to RPC by Hellyer LP based on the amount of the judgment at the legal rate of interest of 10%.  In addition, 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 $1.3 million in interest receivable due from BBE. The $1.3 million interest income accrual was calculated at an interest rate of LIBOR plus 1.25%. The Company’s appeal was unsuccessful, and in December 2011, the Company finalized the details with its legal counsel to arrange for the transfer of funds held by the California Superior Court to pay off the judgment plus accrued interest, and coordinate with the Independent Directors Committee of the Board of Directors and BBE on the transfer of the former RPC interest from BBE to RPC. The amount of approximately $9.2 million, consisting of the aggregate distributions and accrued interest, is owed by BBE to the Company. In February 2012, the $9.2 million was applied towards the acquisition of properties from the Berg Group. See note 22 for details of the acquisition.

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

In July 1999, Toeniskoetter Breeding, Inc. (“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 of the board of directors 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 venture 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 $1,800. The Independent Directors Committee of the board of directors 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 $53,600. The Independent Directors Committee of the board of directors 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 $2,800, 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 $1,400 from the sale. The transaction was approved by the Independent Directors Committee of the board of directors. 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 $8,450. The total gain on the sale was approximately $876 of which $438 was the Company’s share. In November 2008, TBI-MWP sold two R&D properties with approximately 311,200 rentable square feet for approximately $65,000. The total gain on the sale was approximately $40,943 of which approximately $20,471 million was the Company’s share. TBI-MWP currently owns one fully leased R&D building totaling approximately 155,500 rentable square feet.

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

During the years ended December 31, 2011, 2010 and 2009, 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 $1,469, $1,101 and $1,118 in rental income in 2011, 2010 and 2009, 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 which rent from related party tenants would be excluded in determining compliance with REIT qualification tests.

Berg Group Commitment to Complete Future Building in Connection with an Acquisition from the Berg Group under the Berg Land Holdings Option Agreement

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 of the board of directors. See Note 22 for the application of this obligation by the Berg Group.

Leasing and Overhead Reimbursements Provided by Berg Controlled Entity

The Company currently leases office space owned by Berg & Berg Enterprises, Inc. for the Company’s headquarters. Rental amount and overhead reimbursements paid to Berg & Berg Enterprises, Inc. were $120 for each year ended December 31, 2011, 2010 and 2009.