As filed with the Securities and Exchange Commission, via EDGAR, on February 28, 2003

REGISTRATION NO. 333-        

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM S-11

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

American Financial Realty Trust

(Exact name of Registrant as specified in its Governing Instruments)

1725 The Fairway, Jenkintown, Pennsylvania 19046

(215) 887-2280

(Address, including Zip Code, and Telephone Number, including

Area Code, of Registrant’s Principal Executive Offices)

Edward J. Matey Jr., Esquire

1725 The Fairway

Jenkintown, Pennsylvania 19046

(215) 887-2280

(Name, Address, including Zip Code, and Telephone Number,

including Area Code, of Agent for Service)

with a copy to:

James W. McKenzie, Jr., Esquire Justin W. Chairman, Esquire Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103 (215) 963-5000 Daniel M. LeBey, Esquire Hunton & Williams Riverfront Plaza, East Tower 951 E. Byrd Street Richmond, Virginia 23219 (804) 788-8200

Approximate date of commencement of the proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box:  ¨

CALCULATION OF REGISTRATION FEE

Title of Securities Being Registered	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee
Common Shares of Beneficial Interest, $0.001 par value	$600,000,000	$48,540

(1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed or supplemented. We cannot sell any of the securities described in this prospectus until the registration statement that we have filed to cover the securities has become effective under the rules of the Securities and Exchange Commission. This prospectus is not an offer to sell the securities, nor is it a solicitation of an offer to buy the securities, in any state where an offer or sale of the securities is not permitted.

Subject to Completion

Preliminary Prospectus dated February 28, 2003

PROSPECTUS

Shares

[AMERICAN FINANCIAL REALTY TRUST LOGO]

Common Shares of Beneficial Interest

This is our initial public offering of common shares of beneficial interest. No public market currently exists for our common shares. We are offering         common shares, and         common shares are being offered by the selling shareholders described in this prospectus. We will not receive any of the proceeds from the sale of common shares by the selling shareholders.

We expect the public offering price to be between $         and $         per share. After pricing of this offering, we expect that the common shares sold in this offering will trade on the New York Stock Exchange under the symbol “AFR.”

Investing in our common shares involves risks.

See “Risk Factors” beginning on page 16 of this prospectus.             

	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to us	$	$
Proceeds, before expenses, to selling shareholders	$	$

The underwriters may also purchase up to an additional         common shares from us at the public offering price, less the underwriting discount, within 30 days after the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We expect to deliver the common shares on or about             , 2003.

Joint Book-Running Managers

Banc of America Securities LLC Friedman Billings Ramsey

UBS Warburg Wachovia Securities

The date of this prospectus is             , 2003

TABLE OF CONTENTS

	Page
A WARNING ABOUT FORWARD LOOKING STATEMENTS	iv
SUMMARY	1
Our Company	1
Market Opportunity	2
Our Strategy	3
Investment Considerations	4
Our Properties	5
Recent Developments and Completed Transactions	5
Transactions in Process	6
Our Structure	8
Institutional Trading of Our Common Shares	9
Registration Rights and Lock-up Agreements	9
Dividend Policy and Distributions	10
Summary Risk Factors	11
The Offering	12
Summary Selected Financial Information	13
RISK FACTORS	16
Risks Related to Our Business and Properties	16
Risks Related to the Real Estate Industry	25
Risks Related to Our Residential Mortgage-Backed Securities Portfolio	28
Risks Related to Our Organization and Structure	29
Tax Risks of Our Business and Structure	33
Risks Related to This Offering	35
USE OF PROCEEDS	38
CAPITALIZATION	39
DILUTION	40
Net Tangible Book Value	40
Dilution After This Offering	40
Differences Between New and Existing Shareholders in Number of Shares and Amount Paid	40
DIVIDEND POLICY AND DISTRIBUTIONS	41
SELECTED FINANCIAL INFORMATION	42
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION	45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	49
Overview	49
Significant Accounting Estimates	50
Results of Operations	53
Comparison of Combined Year Ended December 31, 2002 and Year Ended December 31, 2001	54
Comparison of Years Ended December 31, 2001 and December 31, 2000	55
Reconciliation of Non-GAAP Financial Measures	57
Liquidity and Capital Resources	57
Short-Term Liquidity Requirements	58
Long-Term Liquidity Requirements	59
Commitments	59
Cash Distribution Policy	59
Cash Flows	60
Inflation	61
Quantitative and Qualitative Disclosures about Market Risk	61
OUR BUSINESS AND PROPERTIES	63
Our Company	63
Market Opportunity	63
Our Strategy	65

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	Page
Real Estate Operations	71
Our Formation	72
Investment Considerations	73
Our Properties	74
Recent Developments and Completed Transactions	84
Transactions in Process	85
Environmental Matters	91
Competition	92
Insurance	92
Employees	93
Legal Proceedings	93
Other Types of Investments and Policies	93
MANAGEMENT	97
Trustees and Executive Officers	97
Corporate Governance – Board of Trustees and Committees	100
Interlocks and Insider Participation	102
Compensation of Trustees	102
Executive Compensation	103
Employment Agreements	104
401(k) Plan	106
2002 Equity Incentive Plan	106
Option Grants	109
Option Exercises	109
Key Employee Incentive Compensation Plan	109
Supplemental Executive Retirement Plan	110
PRINCIPAL AND SELLING SHAREHOLDERS	112
Principal Shareholders	112
Selling Shareholders	113
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	114
Related Party Benefits	114
Related Party Leases	117
Related Party Management Services	117
DESCRIPTION OF SHARES	118
General	118
Voting Rights of Common Shares	118
Dividends, Liquidation and Other Rights	118
Power to Reclassify Shares	119
Power to Issue Additional Common Shares or Preferred Shares	119
Restrictions on Ownership and Transfer	119
Transfer Agent and Registrar	121
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND BYLAWS	122
Number of Trustees; Vacancies	122
Classification of Our Board of Trustees	122
Removal of Trustees	122
Business Combinations	123
Control Share Acquisitions	123
Merger, Amendment of Declaration of Trust	124
Limitation of Liability and Indemnification	124
Operations	125
Term and Termination	125
Meetings of Shareholders	125

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	Page
Advance Notice of Trustee Nominations and New Business	126
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws	126
PARTNERSHIP AGREEMENT	127
Management	127
Transferability of Interests	127
Capital Contribution	127
Conversion Rights	128
Distributions	129
Allocations	129
Term	129
Tax Matters	129
REGISTRATION RIGHTS AND LOCK-UP AGREEMENTS	130
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT	132
Taxation of Our Company	132
Requirements for Qualification	134
Other Tax Consequences	144
Income Taxation of the Partnerships and Their Partners	145
UNDERWRITING	149
LEGAL MATTERS	152
EXPERTS	152
WHERE YOU CAN FIND MORE INFORMATION	152
GLOSSARY	154
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES	F-1

iii

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects are forward-looking by their nature:

• our business strategy;

• our projected operating results;

• completion of any transactions in process that we have under contract;

• our ability to obtain future financing arrangements;

• estimates relating to our future dividends;

• our understanding of our competition;

• market trends;

• projected capital expenditures;

• the impact of technology on our products, operations and business; and

• use of the proceeds of this offering.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares, along with the following factors that could cause actual results to vary from our forward-looking statements:

• the factors referenced in this prospectus, including those set forth under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business and Properties”;

• general volatility of the capital markets and the market price of our common shares;

• changes in our business strategy;

• availability, terms and deployment of capital;

• availability of qualified personnel;

• changes in our industry, interest rates or the general economy; and

• the degree and nature of our competition.

When we use the words “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements.

iv

SUMMARY

The following summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common shares. You should read the entire prospectus, including “Risk Factors,” before making a decision to invest in our common shares. American Financial Realty Trust was formed as a Maryland real estate investment trust, or REIT, on May 23, 2002. Until September 10, 2002, when we acquired our initial properties and operating companies through the formation transactions described below under “Our Business and Properties—Our Formation,” we had no historical operations. In this prospectus, unless the context suggests otherwise, references to “the company,” “we,” “us” and “our” mean American Financial Realty Trust, including our operating partnership and other subsidiaries. Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of their over-allotment option to purchase up to an additional                      common shares. Certain terms used in this prospectus are defined in the glossary beginning on page 154.

Our Company

We are the largest real estate company, and upon completion of the offering will be the only public REIT, focused solely on acquiring and operating properties leased to regulated financial institutions. As banks continue to divest their corporate real estate, we believe that our strategic relationships as well as our flexible acquisition and lease structures position us for continued growth. We seek to lease our properties on a long-term, net lease basis to high credit quality tenants, resulting in attractive returns on our capital.

We believe that our innovative approach provides banks and other financial institutions with operational flexibility and the benefits of reduced real estate exposure. We acquire both core and underutilized real estate from banks through our three acquisition structures: sale leaseback transactions, formulated price contracts and specifically tailored transactions. We believe that our recent transactions with Bank of America, Wachovia Bank, KeyBank and AmSouth Bank demonstrate our ability to cultivate mutually beneficial relationships with leading financial institutions.

Our management team has extensive experience in real estate acquisitions, financing and asset management, as well as a strong understanding of bank regulatory requirements. Since 1998, our management team has worked to acquire bank-related real estate. We believe that our real estate focus and our ability to lease vacant space at market rates allow us to manage our real estate portfolio more effectively than major financial institutions.

By focusing on real estate occupied by banks and other financial institutions, we also believe that we can acquire properties that provide stable risk-adjusted returns due to the strong credit profile of our tenants. As of February 14, 2003, 80.9% of our 2003 contractual rent, including the transactions in process described in this prospectus, will be derived from financial institutions, including regulated banks. We expect to receive, including from our transactions in process, 75.0% of our 2003 contractual rent from financial institutions with current credit ratings of A or better as reported by Standard & Poor’s.

Since our private placement of common shares in September 2002, in which we raised net proceeds of approximately $378.6 million, we have acquired an aggregate of approximately $620.8 million of properties containing approximately 6.1 million rentable square feet, including the initial properties we acquired in the formation transactions completed at the time of our private placement. As of February 14, 2003, our portfolio consisted of 130 bank branches and 37 office buildings. In addition, as of February 14, 2003, we had entered into contracts to acquire approximately $1.1 billion of properties containing approximately 10.5 million rentable square feet.

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Our executive offices are located at 1725 The Fairway, Jenkintown, Pennsylvania 19046. Our telephone number is (215) 887-2280.

Market Opportunity

According to the Federal Deposit Insurance Corporation, or FDIC, commercial banks and savings institutions that are FDIC-insured owned approximately $91.2 billion in operating real estate assets as of September 30, 2002. We have identified two major trends in the banking industry that we believe will continue to generate significant opportunities for us to acquire core, surplus and underutilized real estate from banks and other financial institutions. First, we believe that banks and other financial institutions will continue to sell real estate, enter into long-term leases with the acquiror and reinvest the proceeds from these sales into their primary operating businesses. Second, we anticipate that continued consolidation within the banking industry will create opportunities for us to acquire surplus bank branches and lease the branches to other banks that are expanding their market presence.

Office Buildings and Other Core Real Estate.    We believe that the sale leaseback of office buildings and other core real estate by financial institutions reflects a general trend among these institutions to focus on their primary businesses and reduce their ownership and management of real estate. We believe that financial institutions are focused on the control of their real estate through long-term leases with a preferred landlord, rather than ownership. This parallels trends that have occurred in other industries, such as retail, where location and quality of real estate are key elements of the business. Many banks and other financial institutions have only recently begun to enter into sale leaseback transactions with real estate owners relating to their office buildings and other core real estate.

Through the sale of their real estate to us, financial institutions may be able to improve their liquidity, eliminate depreciation expense associated with owning real estate, redeploy the proceeds from these sales into their primary business and ultimately increase earnings and key financial ratios. In addition to providing an efficient means for these companies to divest their real estate, we are able to effectively meet their occupancy needs. In our experience, many of the office buildings that we acquire from financial institutions have not been managed so as to realize the property’s full potential and contain vacant space that we can lease either to other financial institutions or to other high credit quality businesses.

Bank Branches.    We acquire bank branches from banks and other sellers. At the time we acquire them, some of these bank branches are vacant and some are leased. Our strategy of acquiring surplus bank branches is driven primarily by consolidation in the banking industry and by the ongoing sale of lower deposit level branches from the portfolios of larger banks. Industry consolidation can be measured by the total dollar volume of mergers and acquisitions among banks, which totaled more than $508.0 billion from January 1, 1998 through January 1, 2003 according to Securities Data Corporation. Additionally, we acquire portfolios of leased bank branches from banks seeking sale leaseback transactions as they focus on their primary businesses and reduce their ownership of real estate. Although the number of commercial banks and savings institutions has been declining due to consolidation, the number of bank branches in the U.S. has grown modestly as local and regional banks have expanded their branch networks. For example, according to the FDIC, the number of commercial banks and savings institutions that are FDIC-insured declined from 10,461 as of December 31, 1998 to 9,415 as of September 30, 2002. However, the FDIC reported that, during the same time period, the number of FDIC-insured bank branches increased from 74,224 to 77,463.

Banks typically require minimum deposit levels at their branches to support their cost structure and to operate profitably, and often will close branches that do not meet these minimum levels. Smaller community banks are typically able to operate profitably on lower deposit levels than larger banks. Our experience has demonstrated that significant demand exists among smaller banks to lease well-located branches vacated by

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larger banks. In addition, although bank branches are typically considered specialty-use properties, they can be adapted for use by restaurants, law firms, accounting firms, drug stores and other commercial tenants.

Our Strategy

We seek to become the preferred landlord of leading banks and other financial institutions through the development of mutually beneficial relationships and by offering flexible acquisition structures and lease terms. We believe that this strategy gives us a competitive advantage over more traditional real estate companies in acquiring real estate owned by banks and other financial institutions. Our strategy is designed to provide us with both external and internal growth opportunities.

External Growth

We believe that the following strengths and advantages will allow us to realize significant external growth:

• Offering Flexible Acquisition Structures.    We use a variety of innovative acquisition and lease structures designed to meet the occupancy needs of banks and other financial institutions, while at the same time allowing them to improve their financial condition and operating results. In addition, we acquire a range of real estate from financial institutions, including core operating properties, underutilized office buildings and surplus bank branches. Our three acquisition structures are:

Sale Leaseback Transactions.    Under this structure, we acquire properties and lease them back to the seller pursuant to a triple net or bond net lease, where rent is based largely upon the property’s purchase price and the tenant’s credit;

Formulated Price Contracts.    Pursuant to these agreements, we acquire or assume leasehold interests in the surplus bank branches of a financial institution at a pre-formulated price typically based on the fair market value of the property as determined through an independent appraisal process; and

Specifically Tailored Transactions.    These transactions, which typically relate to the acquisition of office buildings and often include a partial sale leaseback with the seller, apply leasing and pricing structures that we tailor to meet the seller’s specific needs.

• Fostering Relationships.    We currently have contractual relationships with Bank of America, KeyBank and Wachovia Bank relating to the purchase and repositioning of their bank branches. In addition, we have completed acquisitions with, and have entered into agreements to acquire properties from, six national and super-regional financial institutions, and have leased properties to over 35 financial institutions. We have also had discussions with numerous other top 100 banks, as well as smaller institutions, which we believe will generate significant opportunities to expand our business.

• Strong Acquisition Pipeline.    As of February 14, 2003, we had entered into contracts to acquire approximately $1.1 billion of properties, including 145 office buildings and 202 bank branches, most of which we anticipate closing by the end of the second quarter of 2003. See “Our Business and Properties—Transactions in Process.” These properties contain an aggregate of approximately 10.5 million rentable square feet and are located in 19 states.

Internal Growth

We believe that our significant sources for internal growth include:

• Underutilized Real Estate.    Through our specifically tailored transactions, we often acquire properties with underutilized space at prices reflecting their current occupancy. We acquire vacant

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bank branches under our formulated price contracts based on independent appraisals using a valuation methodology that takes the vacancy of the property into account. Our proven ability to lease these properties to quality tenants under long-term leases provides us with the opportunity to increase cash flow from our portfolio of existing leases.

• Market Rate Leases.    Many of the leases in place on properties we acquire are below the current market rates when we acquire those properties. We seek to renegotiate short-term and below market leases to achieve longer lease terms at market rates, and we also actively manage our portfolio to achieve higher lease rates when leases on our properties expire or come up for renewal.

• Scheduled Rent Increases.    We strive to include scheduled rent increases in our leases, which provide us with reliable growth in cash flow and protection from inflation.

Investment Considerations

We believe that our business strategy and operating model distinguish us from other owners, operators, acquirors and developers of real estate in a number of ways, including:

• Attractive Industry.    The extensive real estate holdings of the banking industry present us with the opportunity to continue to grow our portfolio in the future. We believe that consolidation activity, the sale of underutilized real estate and other trends in the banking industry are likely to continue to result in attractive acquisition opportunities for us.

• Limited Competition.    We are the largest real estate company, and upon completion of this offering will be the only public REIT, focused solely on acquiring and operating properties leased to regulated financial institutions. We believe that we are the first real estate company that acquires the full range of real estate from banks and other financial institutions utilizing our unique formulated price contract structure as well as sale leasebacks and specifically tailored transactions. Most of our acquisitions have not resulted from a competitive bidding process.

• High Credit Quality Tenants.    Our tenant base consists principally of banks and other financial institutions that are highly regulated and generally have strong credit profiles. As of February 14, 2003, 75.0% of our 2003 contractual rent, including our transactions in process, is expected to come from financial institutions with current credit ratings of A or better as reported by Standard & Poor’s. All of our bank tenants are subject to regulatory oversight by government agencies that impose certain minimum capital requirements and other restrictions that are intended to ensure ongoing financial viability.

• Proven Track Record.    Prior to completing our private placement in September 2002, our predecessor entities, under the leadership of our senior management team, completed approximately $650.0 million in purchase, sale and lease transactions involving 217 properties containing approximately 3.5 million rentable square feet. Since our private placement, we have acquired approximately $404.8 million of real estate containing approximately 4.6 million rentable square feet, excluding the initial properties we acquired in the formation transactions completed at the time of our private placement.

• Diversified Real Estate Strategy.    Our portfolio is diversified geographically, by asset type within the banking industry and by lease expiration. As of February 14, 2003, our portfolio included both small and large office buildings, as well as bank branches, leased to 170 different tenants in 19 states, including our two largest tenants, Bank of America, N.A. and Wachovia Bank, N.A. No more than 8.8% of our leases, based on our 2003 contractual rent, expire in any one of the next 10 years. Our business strategy includes traditional principles of diversification that we believe will help to insulate us from regional changes in economic conditions and the financial condition of specific tenants.

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• Growth Strategy.    We believe that our focus on an attractive industry, our relationships and our flexible acquisition structures provide us with a strong acquisition pipeline. Through our active management and leasing efforts, we believe that we are well-positioned to maximize the value of the underutilized real estate we acquire. In addition, we strive to increase cash flow from these properties by obtaining long-term leases with scheduled rent increases.

• Stable Risk-Adjusted Returns.    Our properties are typically attractive, well-maintained assets in prime locations that we are able to lease on a long-term basis to high credit quality tenants. We typically enter into long-term triple net or bond net leases with our tenants, many of which are the sellers of the properties. As of February 14, 2003, leases representing 78.1% of our 2003 contractual rent, including our transactions in process, are scheduled to expire after 2010. In addition, we anticipate that approximately 81.7% of the 2003 contractual rent from our leases as of February 14, 2003, including our transactions in process, will be generated from triple net and bond net leases. In a triple net lease, the tenant is typically responsible for real estate taxes, insurance and all repairs and maintenance. In a bond net lease, the tenant is typically responsible for real estate taxes, insurance, all repairs and maintenance and assumes the risk of condemnation and casualty. We believe that these types of leases generate consistent and predictable returns, protecting us from market fluctuations and increases in operating expenses.

Our Properties

As of February 14, 2003, we owned or held leasehold interests in 167 properties located in 19 states, containing an aggregate of approximately 6.0 million rentable square feet. As of that date, the aggregate 2003 contractual rent expected from our properties was approximately $68.8 million.

The following table describes our portfolio as of February 14, 2003:

Our Portfolio as of February 14, 2003

Properties(1)	Number of Buildings	Rentable Square Feet	Percentage of 2003 Contractual Rent
Large office buildings	18	4,873,915	84.0	%
Small office buildings	19	549,444	7.2
Bank branches	130	565,345	8.8
Total	167	5,988,704	100.0	%

	Weighted Average Remaining Lease Term(2)	Occupancy Rate	Percentage of 2003 Contractual Rent from Financial Institutions		Percentage of 2003 Contractual Rent from Net Leases
Total properties	15.5 years	93.0%	89.2	%	88.2	%

(1) Large office buildings represent properties with 60,000 rentable square feet or more. Small office buildings represent properties with fewer than 60,000 rentable square feet.

(2) Weighted based on 2003 contractual rent.

Recent Developments and Completed Transactions

We completed a private placement of 40,765,241 common shares on September 10, 2002, in which we raised net proceeds of approximately $378.6 million. At that time, in our formation transactions, we acquired from our predecessor entities and other related parties 87 bank branches and six office buildings containing approximately 1.5 million rentable square feet. The aggregate purchase price for these properties was approximately $216.0 million.

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The following table presents information as of February 14, 2003, regarding the acquisitions completed since our September 2002 private placement, excluding the properties we acquired in our formation transactions:

Transactions Since September 10, 2002

Seller	Property Type	Acquisition Structure	Closing Date	Number of Buildings	Rentable Square Feet	Purchase Price(1)
						(in thousands)
KeyBank	Bank branches	Formulated Price	Sept. 27, 2002	2	21,900	$	426
Bank of America	Bank branches	Formulated Price	Oct. 24, 2002	5	65,118		3,139
Wachovia Bank	Bank branches	Formulated Price	Dec. 10, 2002	26	157,229		24,448
Bank of America	Small office	Specifically Tailored	Dec. 16, 2002	16	509,921		31,807
AmSouth	Bank branches	Formulated Price	Dec. 20, 2002	11	28,340		2,591
Dana Commercial Credit	Large office	Sale Leaseback	Jan. 10, 2003	14	3,759,634		339,279
Wachovia Bank	Bank branches	Formulated Price	Feb. 5, 2003	5	15,519		2,810
AmSouth	Bank branch	Formulated Price	Feb. 12, 2003	1	3,897		260
Total				80	4,561,558	$	404,760

(1) Includes all acquisition costs.

We have also engaged in the following financing transactions:

• On January 21, 2003, we obtained a $200.0 million bridge loan from Bank of America, N.A. in connection with acquiring a portfolio of 14 office buildings from a wholly owned subsidiary of Dana Commercial Credit Corporation for a total purchase price of approximately $339.3 million. The bridge loan has a 60 day term and bears interest at an annual rate of LIBOR plus 1.25%. We intend to replace this bridge loan with long-term credit tenant lease financing prior to its maturity date.

• We have received a commitment from Bank of America, N.A. for a $75.0 million credit facility that we will use to finance selected property acquisitions and for working capital purposes. We anticipate that this credit facility will have a term of three years, will bear interest at an annual rate of LIBOR plus         %, and will be secured by interests in selected properties. Availability under this credit facility will be determined based on the net present value of the monthly base rent payments on the properties securing the loan. Only properties satisfying various specified parameters may be used to secure our obligations under this credit facility, including minimum credit ratings for the tenants in these properties.

Transactions in Process

As of February 14, 2003, we also have entered into contracts to complete acquisitions having an aggregate transaction value of approximately $1.1 billion, pursuant to which we would acquire 145 office buildings containing approximately 9.5 million rentable square feet and 202 bank branches containing approximately 1.0 million rentable square feet. We cannot assure you that we will be able to complete any of the acquisitions that we have under contract or that the terms we have negotiated will not change.

Our largest transaction in process is with Bank of America. We entered into an agreement with Bank of America on February 14, 2003 to acquire a portfolio of 124 office buildings containing approximately 8.2 million rentable square feet. The aggregate purchase price for the properties is expected to be approximately $749.0 million, approximately 45% of which we expect to fund using the proceeds of this offering, with the remainder of the purchase price to be financed with long-term indebtedness. Bank of America has the right, during our due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and the further ability, subject to our approval and to other terms and conditions, to add properties to the portfolio or to substitute properties for those currently in the portfolio. The aggregate purchase price for the portfolio will be

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adjusted to account for any additions, reductions or substitutions. Subject to satisfactory completion of our due diligence and satisfaction of customary closing conditions, we anticipate closing this acquisition in stages beginning in the second quarter of 2003. This acquisition is required to close no later than October 2003. Upon completion of the transaction, Bank of America will initially lease an aggregate of approximately 65% of the rentable square feet in this portfolio with a lease term of 20 to 29 ¹/2 years. Approximately 12.0% of the rentable square feet is currently leased to third parties.

The following table presents information regarding the properties that we have under contract as of February 14, 2003:

Transactions in Process as of February 14, 2003 

Seller	Property Type	Acquisition Structure	Anticipated Closing	Number of Buildings		Rentable Square Feet		Projected Purchase Price (1)
								(in thousands)
Wachovia Bank	Bank branches	Formulated Price	March 2003	18		102,000		$	12,700
Bank of America	Bank branches	Formulated Price	March 2003	6		96,200			3,200
Pitney Bowes—Wachovia Bank	Bank branches	Sale Leaseback	March 2003	73		346,320			62,243
	Small office	Sale Leaseback	March 2003	12		457,712			47,109
	Large office	Sale Leaseback	March 2003	2		250,668			34,098
Pitney Bowes—Bank of America	Bank branches	Sale Leaseback	March 2003	98		461,216			84,037
Finova Capital—BB&T	Bank branches	Sale Leaseback	March 2003	7		48,911			4,210
	Small office	Sale Leaseback	March 2003	1		32,400			2,790
	Large office	Sale Leaseback	March 2003	2		169,497			14,600
Bank of America	Small office	Specifically Tailored	March 2003	2		44,000			2,200
Bank of America	Small office	Specifically Tailored	May 2003(2)	97	(3)	2,758,620	(3)		251,563	(3)
	Large office	Specifically Tailored	May 2003(2)	27	(3)	5,454,661	(3)		497,137	(3)
Wachovia Bank	Small office	Formulated Price(4)	July 2003	1		30,000			3,080
First States Wilmington, L.P.	Large office	Specifically Tailored	—  (5)	1		263,000			50,000
Total				347		10,515,205		$	1,068,968

(1) Includes all estimated acquisition costs.

(2) This transaction will close in stages beginning in May 2003 and is required to close no later than October 2003.

(3) Under our agreement with Bank of America, N.A., for the purchase of 124 office buildings, Bank of America has the right, during our due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and the further right, subject to our approval and to other terms and conditions, to add properties to the portfolio or to substitute properties for those currently in the portfolio. The aggregate purchase price for the portfolio will be adjusted to account for any additions, reductions or substitutions.

(4) Small office buildings may, in limited circumstances, be purchased under our formulated price contract with Wachovia Bank, N.A.

(5) We have an option to purchase this property at any time prior to May 24, 2007.

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The following table presents our portfolio as of February 14, 2003 and assumes the acquisition of all of the properties described in the preceding table:

Our Portfolio Including Transactions in Process

Properties(1)	Number of Buildings	Rentable Square Feet	Percentage of 2003 Contractual Rent
Large office buildings	50	11,011,741	66.7	%
Small office buildings	132	3,760,784	22.8
Bank branches	332	1,731,384	10.5
Total	514	16,503,909	100.0	%

	Weighted Average Remaining Lease Term(2)	Occupancy Rate		Percentage of 2003 Contractual Rent from Financial Institutions		Percentage of 2003 Contractual Rent from Net Leases
Total properties	14.0 years	83.2	%	80.9	%	81.7	%

(1) Large office buildings represent properties with 60,000 rentable square feet or more. Small office buildings represent properties with fewer than 60,000 rentable square feet.

(2) Weighted based on 2003 contractual rent.

Our Structure

Through our wholly owned subsidiary, First States Group, LLC, we are the sole general partner of our operating partnership, First States Group, L.P. We own the general partnership interest and limited partnership units of our operating partnership representing approximately 90.5% of the total partnership interests as of December 31, 2002. The remaining holders of limited partnership units may convert their units into common shares on a one-for-one basis, subject to adjustments for stock splits, dividends, recapitalizations and similar events. At our option, in lieu of issuing common shares upon conversion of units, we may redeem the units tendered for conversion for a cash amount equal to the value of the common shares. We expect that, when limited partnership unitholders elect to convert their units, we will typically issue common shares and not redeem the units for cash. Holders of units have received and will receive distributions equivalent to the dividends we pay to holders of our common shares. We conduct all of our business through our operating partnership, and hold all of our interests in properties in limited liability companies or limited partnerships that are wholly owned subsidiaries of our operating partnership. As the sole owner of the general partner of our operating partnership, we have the exclusive power to manage and conduct our operating partnership’s business, subject to the limitations described in the Amended and Restated Agreement of Limited Partnership of our operating partnership. See “Partnership Agreement” beginning on page 127.

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The following chart illustrates our structure:

Institutional Trading of Our Common Shares

Currently, the 40,765,241 common shares issued pursuant to our private placement in September 2002 trade in The Portal^SM Market, a subsidiary of the Nasdaq Stock Market, Inc., which permits trading among qualified institutional buyers of securities that are sold in private placements to qualified institutional buyers and are eligible for resale in accordance with Rule 144A under the Securities Act. After the completion of this offering, these common shares may continue to trade in The Portal^SM Market, subject to lock-up agreements with the underwriters. The last trade of our common shares on The Portal^SM Market occurred on February 21, 2003 at a price of $11.85 per share, which may not be indicative of the trading price of our shares on the New York Stock Exchange after this offering.

Registration Rights and Lock-up Agreements

Current Shareholders.    On January 23, 2003, we sent to all of our shareholders, as reflected in our books and records as of that date, notice of our intention to file a registration statement with the SEC for this offering. We sent this notice pursuant to registration rights agreements between us and our shareholders, under which the shareholders have the right to sell in this offering all or a portion of their common shares, subject to various rights of the underwriters and other conditions referred to below.

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Because this offering is underwritten, these registration rights agreements:

• require the selling shareholders to enter into the underwriting agreement for this offering;

• permit the underwriters, based on marketing factors, to limit the number of shares the selling shareholders can sell in this offering; and

• condition the selling shareholders’ participation in this offering on compliance with applicable provisions of the registration rights agreement.

As of February     , 2003, we have received notices from shareholders to include                      common shares in this offering.

In addition, we will file with the SEC a registration statement under the Securities Act covering the resale of any of our shareholders’ common shares not included in this offering, and will use our best commercially practicable efforts to cause the resale registration statement to be declared effective as promptly as practicable following the date of this prospectus. The shareholders whose shares will be included in the resale registration statement will be restricted from, without the prior written consent of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., directly or indirectly offering, selling, contracting to sell or otherwise disposing of or hedging their common shares covered by that registration statement for 45 days following the date of this prospectus. This 45 day lock-up period will automatically terminate, however, upon the later to occur of (i) exercise in full of the underwriters’ over-allotment option and (ii) the fifth consecutive day on which the closing price of our common shares on the New York Stock Exchange equals at least 120% of the public offering price of our common shares, or $        .

We have agreed to maintain the effectiveness of the resale registration statement until the later of:

• the first trading day after 90 days have elapsed following the effective date of the resale registration statement, not including days on which we prohibit the selling shareholders from selling shares; and

• September 10, 2003.

Operating Partnership Unitholders.    We will include in the resale registration statement common shares issuable upon the conversion of units of our operating partnership. These unitholders are prohibited from converting their units into common shares until March 10, 2003. The unitholders will be prohibited, without the prior written consent of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., from directly or indirectly, offering, selling, contracting to sell or otherwise disposing of or hedging their common shares and securities convertible into or exchangeable for our common shares for a period of 45 days after the date of this prospectus. In the case of units owned by Friedman, Billings, Ramsey & Co., Inc., this period will be 180 days.

Trustees, Executive Officers and Related Parties.    In addition, pursuant to the underwriting agreement for this offering, we, our trustees, our executive officers and FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc., have entered into lock-up agreements with the underwriters under which we and each of these securityholders may not, for a period of 180 days after the date of this prospectus, offer, sell, contract to sell or otherwise dispose of or hedge our common shares or securities convertible into or exchangeable for our common shares, without the prior written approval of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc.

Dividend Policy and Distributions

We intend to distribute to our shareholders each year all or substantially all of our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings and to qualify for the tax benefits accorded to REITs under the Internal Revenue Code of 1986, as amended. The actual amount and timing of distributions,

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however, will be at the discretion of our board of trustees and will depend upon actual results of operations and a number of other factors discussed in the section “Dividend Policy and Distributions” on page 41, including:

• the timing of the investment of the proceeds of this offering;

• the rent received from our tenants;

• the ability of our tenants to meet their other obligations under their leases; and

• our operating expenses.

For the period from September 10, 2002 through December 31, 2002, we declared our initial dividend of $0.22 per common share, payable to shareholders of record on December 31, 2002. We distributed this dividend on January 20, 2003.

On                 , 2003, we announced that we will pay a dividend of $             per common share for the quarter ending March 31, 2003 to shareholders of record on March 31, 2003. We will distribute this dividend on                 , 2003.

Summary Risk Factors

You should carefully consider the matters discussed in the section “Risk Factors” beginning on page 16 prior to deciding whether to invest in our common shares. Some of these risks include:

• we expect to continue to experience rapid growth and may not be able to adapt our management and operational systems to respond to the acquisition and integration of additional properties without unanticipated disruption or expense;

• if we are unable to complete, or experience significant delays in completing, our transactions in process, our ability to make distributions to our shareholders will be adversely affected;

• we have a brief operating history as a REIT and may not be able to successfully and profitably operate our business;

• we may be unable to lease our properties, which may adversely affect our financial condition and results of operations;

• our use of debt financing and our substantial existing debt obligations may decrease our cash flow and put us at a competitive disadvantage;

• if there is a decline in either of the two major trends in the banking industry that we rely upon for our growth, including the continued sale leaseback of real estate by banks and other financial institutions and the continued consolidation within the banking industry, we may be unable to successfully execute our business plan or expand our operations;

• because our strategy is to focus on properties concentrated in the banking industry, a general downturn in this industry could have a material adverse effect on our financial condition and results of operations;

• we are dependent upon significant tenants, including Bank of America, N.A. and Wachovia Bank, N.A., that may be difficult or costly to replace. The loss of either of these tenants could have a material adverse effect on our financial condition and results of operations;

• we may be unable to invest the excess equity capital raised in this offering on acceptable terms or at all; and

• we invest in residential mortgage-backed securities as part of our short-term cash management strategy and are exposed to the risks inherent in investing in these instruments.

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The Offering

Common shares offered by us	shares(1)
Common shares offered by selling shareholders	shares
Common shares to be outstanding after this offering	shares(2)
Use of Proceeds	We will use the net proceeds of this offering, which are estimated to be approximately $         million based on an assumed public offering price of $          per share, after deducting the underwriting discount and estimated expenses payable by us:
	•	to fund approximately $315 million of the equity portion of the purchase price of the acquisitions described under “Our Properties—Transactions in Process”;
	•	to fund the equity portion of the purchase price of future acquisitions; and
	•	for general corporate and working capital purposes.
	Pending these uses, we intend to invest the net offering proceeds in fixed- and adjustable-rate residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, or in interest-bearing, short-term investment grade securities or money market accounts, which are consistent with our intention to qualify as a REIT. We intend to finance our investments in residential mortgage-backed securities by entering into reverse repurchase agreements to leverage the overall return on capital invested in this portfolio.
Risk Factors	See “Risk Factors” beginning on page 16 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to invest in our common shares.
New York Stock Exchange symbol	“AFR”

(1) Excludes up to                      common shares that may be issued by us upon exercise of the underwriters’ over-allotment option.

(2) Excludes (i) up to                      common shares that may be issued by us upon exercise of the underwriters’ over-allotment option, (ii) approximately 4,455,966 common shares issuable upon conversion of outstanding units of our operating partnership and (iii) 2,842,625 common shares reserved for issuance upon exercise of outstanding options.

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Summary Selected Financial Information

The summary selected financial information presented below under the captions “Operating Information” and “Balance Sheet Information” as of December 31, 2002 and for the period from September 10, 2002 to December 31, 2002 are derived from the consolidated financial statements of American Financial Realty Trust. The financial information as of December 31, 2001 and for the period January 1, 2002 to September 9, 2002 and for each of the years in the three year period ended December 31, 2001 are derived from the combined financial statements of American Financial Real Estate Group, or AFREG, which is deemed to be our predecessor for accounting purposes. These financial statements have been audited by KPMG LLP, independent auditors. The consolidated balance sheet as of December 31, 2002 and the combined balance sheet as of December 31, 2001, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for the period from September 10, 2002 to December 31, 2002, and the related combined statements of operations, owners’ net investment and cash flows for the period January 1, 2002 to September 9, 2002 and for each of the years in the two year period ended December 31, 2001, and the report thereon, are included elsewhere in this prospectus. The summary selected financial information presented below as of and for the year ended December 31, 1998 is derived from the unaudited combined financial statements of AFREG and includes adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and results of operations as of such date and for such period under generally accepted accounting principles.

The historical financial statements of AFREG represent the combined financial condition and results of operations of the entities that previously owned our initial properties and operating companies, as well as several properties and an entity controlled by Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees, or by his wife, Shelley D. Schorsch, our Senior Vice President—Corporate Affairs, that we did not acquire in connection with our formation transactions. See “Our Business and Properties—Our Formation.” In addition, the historical financial information for AFREG included herein and set forth elsewhere in this prospectus reflects AFREG’s corporate investment strategy. Historically, AFREG often funded new acquisitions by selling properties, a strategy which we discontinued when we became a REIT. Accordingly, historical financial results are not indicative of our future performance. In addition, since the financial information presented below is only a summary and does not provide all of the information contained in our financial statements, including related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the financial statements, including related notes, and Unaudited Pro Forma Financial Information, each contained elsewhere in this prospectus. Pro forma information has been compiled from historical financial and other information, but does not purport to represent what our financial position or results of operations actually would have been had the transactions occurred on the dates indicated, or to project our financial performance for any future period.

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	Pro Forma						Predecessor
	Year Ended December 31, 2002			September 10, 2002 to December 31, 2002			January 1, 2002 to September 9, 2002			Year Ended December 31,
										2001			2000			1999			1998
	(unaudited)																		(unaudited)
	(in thousands)
Operating Information:
Revenues:
Rental income	$	137,639		$	8,338		$	17,314		$	25,815		$	13,483		$	5,837		$	1,365
Operating expense reimbursements		59,258			2,813			5,577			7,663			2,085			875			29
Interest income		43,726			18,736			105			188			485			482			92
Other income		859			37			822			582			1,173			748			789
Total revenues		241,482			29,924			23,818			34,248			17,226			7,942			2,275
Expenses:
Operating expenses		91,415			3,828			7,200			9,770			5,194			2,403			211
General and administrative expenses		11,011			3,645			4,695			8,212			7,185			3,686			810
Depreciation and amortization		57,945			2,911			5,849			8,468			3,082			1,003			542
Interest expense		46,858			9,999			9,737			14,071			6,042			2,410			507
Total expenses		207,229			20,383			27,481			40,521			21,503			9,502			2,070
Income (loss) before net gains on sale of properties		34,253			9,541			(3,663	)		(6,273	)		(4,277	)		(1,560	)		205
Net gain on sale of properties		846			846			—			4,107			8,934			4,468			—
Realized loss on sales of investments, net		(280	)		(280	)		—			—			—			—			—
Income tax expense		(131	)		(131	)		—			—			—			—			—
Income (loss) from continuing operations before minority interest		34,688			9,976			(3,663	)		(2,166	)		4,657			2,908			205
Minority interest		(1,597	)		(849	)		—			—			—			—			—
Income (loss) from continuing operations	$	33,091			9,127			(3,663	)		(2,166	)		4,657			2,908			205
Discontinued operations:
Income (loss) from operations					(211	)		(180	)		(114	)		499			165			(6	)
Gains on disposals					28			9,500			—			—			—			—
Income (loss) from discontinued operations					(183	)		9,320			(114	)		499			165			(6	)
Net income (loss)				$	8,944		$	5,657		$	(2,280	)	$	5,156		$	3,073		$	199
Basic earnings per share:
From continuing operations				$	0.22
Discontinued operations					—
Total basic earnings per share				$	0.22
Diluted earnings per share:
From continuing operations				$	0.21
Discontinued operations					—
Total diluted earnings per share				$	0.21
Weighted average common shares outstanding (basic)					42,168
Weighted average common shares outstanding (diluted)					46,938
Dividends/distributions declared for shareholders per share and OP Unitholders per unit				$	0.22

					Predecessor
	Pro Forma		December 31,
	December 31, 2002		2002		2001		2000		1999			1998
	(unaudited)											(unaudited)
			(in thousands)
Balance Sheet Information:
Real estate investments, at cost	$	1,637,512	$	250,544	$	177,578	$	172,518	$	37,495		$	22,372
Cash and cash equivalents		60,842		60,842		1,597		1,806		321			305
Residential mortgage-backed securities portfolio		1,116,119		1,116,119		—		—		—			—
Total assets		2,979,773		1,605,165		183,760		182,186		48,807			31,824
Mortgage notes payable		691,494		149,886		158,587		158,700		48,728			32,397
Line of credit borrowings		80,000		—		3,791		396		400			—
Other indebtedness		200,000		—		4,754		5,093		75			—
Reverse repurchase agreements		1,053,529		1,053,529		—		—		—			—
Total debt		2,025,023		1,203,415		167,132		164,189		49,203			32,397
Total liabilities		2,053,598		1,231,990		174,611		169,670		51,245			32,759
Minority interest		36,513		36,513		—		—		—			—
Shareholders’ equity and owners’ net investment		889,662		336,662		9,149		12,516		(2,438	)		(935	)
Total liabilities and shareholders’ equity and owners’ net investment		2,979,773		1,605,165		183,760		182,186		48,807			31,824

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	Pro Forma				Predecessor
	Year Ended December 31, 2002		September 10, 2002 to December 31, 2002		January 1, 2002 to September 9, 2002			Year Ended December 31,
								2001			2000			1999			1998
	(unaudited)																(unaudited)
	(in thousands)
Other Information:
Funds from operations (unaudited)(1)	$	—	$	12,778	$	—		$	—		$	—		$	—		$	—
Adjusted funds from operations (unaudited)(2)		—		12,364		—			—			—			—			—
Cash flow:
From operating activities		—		12,594		2,382			4,587			112			(274	)		(414	)
From investing activities		—		1,378,288		12,413			(5,745	)		(116,748	)		(11,708	)		(30,322	)
From financing activities		—		1,426,536		(13,176	)		949			118,121			11,998			31,041

(1) Funds from operations (FFO) represents net income (loss) before minority interest in our operating partnership (computed in accordance with generally accepted accounting principles, or GAAP), excluding gains (or losses) from debt restructuring, including gains (or losses) on sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of funds from operations may differ from the methodology for calculating funds from operations utilized by other equity REITs and, accordingly, may not be comparable to other REITs. Further, funds from operations does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Funds from operations should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flow provided by operating activities determined in accordance with GAAP.

(2) Adjusted funds from operations (AFFO) is a computation made by analysts and investors to measure a real estate company’s cash available for distribution to shareholders. AFFO is generally calculated by subtracting from or adding to FFO (i) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s properties and its revenue stream (e.g., leasing commissions and tenant improvement allowances), (ii) straightlining of rents and (iii) amortization of deferred costs.

Set forth below is a reconciliation of our calculations of FFO and AFFO to net income for the period from September 10, 2002 to December 31, 2002 (amounts in thousands except per share data):

Funds from operations:
Net income	$	8,944
Minority interest in Operating Partnership		938
Depreciation and amortization		2,911
Non real estate depreciation		(15	)
Funds from operations	$	12,778
Funds from operations per share (diluted)	$	0.27
Adjusted funds from operations:
Funds from operations	$	12,778
Straightline rental income		(593	)
Straightline rent expense		44
Tenant improvements and leasing commissions		(134	)
Amortization of deferred costs		90
Amortization of fair market rental adjustment, net		(36	)
Amortization of deferred compensation		215
Adjusted funds from operations	$	12,364
Adjusted funds from operations per share (diluted)	$	0.26

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RISK FACTORS

An investment in our common shares involves a number of risks. Before making an investment decision, you should carefully consider all of the risks described in this prospectus. If any of the risks discussed in this prospectus occurs, our business, financial condition, liquidity and results of operations could be materially and adversely affected, in which case the price of our common shares could decline significantly and you could lose all or a part of your investment. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, financial condition, liquidity and results of operations.

Risks Related to Our Business and Properties

We have recently experienced and expect to continue to experience rapid growth and may not be able to integrate additional properties into our operations or otherwise manage our growth, which may adversely affect our operating results.

We are currently experiencing a period of rapid growth. Since our private placement of common shares in September 2002, we have acquired properties containing approximately 6.1 million rentable square feet for an aggregate purchase price of approximately $620.8 million, including the initial properties we acquired in the formation transactions at the time of our private placement. As of February 14, 2003, we also have identified additional properties containing approximately 10.5 million rentable square feet that we expect to acquire by the end of the second quarter of 2003 for an anticipated aggregate transaction value of approximately $1.1 billion. See “Our Business and Properties—Transactions in Process.” As a result of the rapid growth of our portfolio, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate these properties into our portfolio and manage any future acquisitions of additional properties without operating disruptions or unanticipated costs. Acquisition of any additional portfolio of properties would generate additional operating expenses that we would be required to pay. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. Our failure to successfully integrate any future acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to shareholders.

If we are unable to complete our transactions in process in a timely fashion or at all, our operating results could be adversely affected.

As of February 14, 2003, we have entered into contracts to complete acquisitions having an aggregate transaction value of approximately $1.1 billion, pursuant to which we would acquire 145 office buildings containing approximately 9.5 million rentable square feet and 202 bank branches containing approximately 1.0 million rentable square feet. Included in these acquisitions, under our February 14, 2003 agreement with Bank of America, N.A., is a portfolio of 124 office buildings, containing approximately 8.2 million rentable square feet, for an aggregate purchase price of approximately $749.0 million. This agreement is subject to Bank of America’s right, during our due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and their further ability, subject to our approval and to other terms and conditions, to add properties to the portfolio or to substitute properties for those currently in the portfolio. See “Our Business and Properties—Transactions in Process.” Our ability to complete these acquisitions is dependent upon many factors, such as satisfaction of due diligence and customary closing conditions and our ability to obtain sufficient financing. Our inability to complete these acquisitions or any portion thereof within our anticipated time frame or at all could have a material adverse effect on our results and financial condition and our ability to pay dividends to shareholders.

We have a brief operating history as a REIT and may not be able to successfully and profitably operate our business.

We have recently been organized and have a brief operating history. We will be subject to the risks generally associated with the formation of any new business. In addition, our management has limited experience operating

16

a REIT and no experience in managing a publicly owned company. Therefore, you should be especially cautious in drawing conclusions about the ability of our management team to execute our business plan.

If we are unable to acquire additional properties through our relationships with financial institutions, our ability to execute our business plan and our operating results could be adversely affected.

One of our key business strategies is to capitalize on our relationships with financial institutions and, through our agreements with these institutions, to acquire additional bank branches and other properties. Our current agreements with Bank of America, N.A., KeyBank, N.A. and Wachovia Bank, N.A. may be terminated upon 90 days notice by Bank of America and KeyBank and 30 days notice by Wachovia Bank. We cannot assure you that these banks will maintain their respective agreements with us. If they do not, we may be unable to acquire desirable bank branches and other properties and execute our business strategy. In addition, these financial institutions may not have any surplus properties under these agreements in the future and, therefore, may have no obligation to sell to us any additional properties.

Changes in current regulations governing banks and in current trends in the banking industry also may affect banks’ strategies with respect to the ownership and disposition of real estate. These banks may decide, based on these changes or other reasons, to retain much of their real estate, sell their operating bank branches to another financial institution, redevelop properties or otherwise determine not to sell properties to us. In addition, if our relationships with financial institutions deteriorate or we are unable to maintain these relationships or develop additional relationships, we may be unable to acquire additional properties. We cannot assure you that we will be able to maintain our current rate of growth by negotiating and acquiring properties acceptable to us in the future. If we are unable to acquire additional properties from financial institutions, we may be unable to execute our business plan, which could have a material adverse effect on our operating results and financial condition and our ability to pay dividends to shareholders.

Our use of debt financing and our substantial existing debt obligations may decrease our cash flow and put us at a competitive disadvantage.

We have incurred, and may in the future incur, debt to fund the acquisition of properties. As of December 31, 2002, we had approximately $1.2 billion of outstanding indebtedness, including $1.1 billion of reverse repurchase agreements bearing interest at variable rates. Increases in interest rates on our existing indebtedness would increase our interest expense, which could harm our cash flow and our ability to pay dividends. If we incur additional indebtedness, debt service requirements would increase accordingly, which could further adversely affect our financial condition and results of operations, cash available for distribution and equity value. In addition, increased leverage could increase the risk of our default on debt obligations, which could ultimately result in loss of properties through foreclosure.

Since we anticipate that our cash from operations will be insufficient to repay all of our indebtedness prior to maturity, we expect that we will be required to repay debt through refinancings, financing of unencumbered properties, sale of properties or sale of additional equity. During 2007, we will have to refinance an aggregate amount of approximately $57.1 million of debt, including $52.0 million of debt encumbering one of our properties. The amount of our existing indebtedness may adversely affect our ability to repay debt through refinancings. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of our properties on unfavorable terms, which might result in losses to us and which might adversely affect cash available for dividends. If prevailing interest rates or other factors at the time of refinancing result in higher interest rates on refinancing, interest expense would increase, which could have a material adverse effect on our operating results and financial condition and our ability to pay dividends to shareholders.

On January 21, 2003, we obtained a $200.0 million bridge loan from Bank of America, N.A. in connection with our acquisition of properties from a wholly owned subsidiary of Dana Commercial Credit Corporation. This bridge loan matures on March 24, 2003, and does not provide for any extensions or renewals. We cannot assure

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you that we will be able to obtain permanent financing prior to the maturity date of the bridge loan on favorable terms or at all. If we are not able to secure permanent financing to replace the bridge loan prior to its maturity, we will be in default of our bridge loan agreement with Bank of America and subject to penalties or damages.

We also may incur additional debt in connection with future acquisitions of real estate. We may borrow under a credit facility that we intend to obtain or otherwise borrow new funds to acquire properties. In addition, we may incur or increase our mortgage debt by obtaining loans secured by a portfolio of some or all of the real estate we acquire. We may also borrow funds if necessary to satisfy the requirement that we distribute to shareholders at least 90% of our annual REIT taxable income, or otherwise as is necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes.

Our substantial debt and any increases in our debt may harm our business and our financial results by, among other things:

• requiring us to use a substantial portion of our cash flow from operations to pay interest, which reduces the amount available for operation of our properties or payment of dividends;

• resulting in violation of restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations;

• placing us at a competitive disadvantage compared to our competitors that have less debt;

• making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions;

• requiring us to sell one or more properties, possibly on unfavorable terms; and

• limiting our ability to borrow funds for operations or to finance acquisitions in the future or to refinance our indebtedness at maturity or on terms as or more favorable than the terms of our original indebtedness.

Failure to hedge effectively against interest rate changes may adversely affect our operating results of operations.

We seek to mitigate our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Failure to hedge effectively against interest rate changes may have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

We may be unable to invest our excess equity capital raised in this offering on acceptable terms or at all, which may harm our financial condition and operating results.

Until we identify a real estate investment consistent with our investment criteria, we intend to invest the portion of the proceeds of this offering not used to fund a portion of the purchase price for our transactions in process in adjustable-rate residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We cannot assure you that we will be able to identify real estate investments that meet our investment criteria, that we will be successful in completing any investment we identify or that any investment we complete using the proceeds of this offering will produce a return on our investment. Moreover, because we will not have identified these future investments at the time of this offering, we will have broad authority to invest the excess proceeds of this offering in any real estate investments that we may identify in the future.

We may not have sufficient capital to fully perform our obligations to purchase properties under our agreements with financial institutions, which may subject us to liquidated or other damages or result in termination of these agreements.

Our agreements with financial institutions require us, with limited exceptions, to purchase all bank branches that the banks determine to be surplus properties. If we are unable to accurately forecast the number of

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properties that we may become obligated to purchase, or if we are unable to secure adequate debt or equity financing to fund the purchase price, we may not have sufficient capital to purchase these properties. If we cannot perform our obligations, we may become subject to liquidated or other damages or impair our relationships with these institutions. The other parties may also have the right to terminate these agreements if we breach our obligations under them. Any of these damages could significantly affect our operating results, and if these agreements are terminated, our ability to acquire additional properties and successfully execute our business plan would be significantly impaired. If we are successful in entering into similar agreements with other financial institutions, we may need a significant amount of additional capital to fund additional acquisitions under those agreements. We cannot assure you that we will be able to raise necessary capital on acceptable terms or at all. Our inability to fund required acquisitions would adversely affect our revenues, impair our business plan and reduce cash available for distribution to shareholders.

Failure of our tenants to pay rent could seriously harm our operating results and financial condition.

We rely on rent payments from our tenants as a source of cash to pay dividends to our shareholders. At any time, any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to our company. This risk is particularly prominent with respect to our office buildings and our sale leaseback properties, which typically have tenants with larger aggregate lease obligations than our bank branches. A default by a large tenant of one of these properties could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

In particular, if any of our significant tenants becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a property and prevents us from leasing that property by continuing to pay base rent for the balance of the term, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce the payment obligations under the lease; however, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms.

The bankruptcy or insolvency of our tenants under their leases or delays by our tenants in making rent payments could seriously harm our operating results and financial condition.

Any bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.

Many of our tenants are banks that are not eligible to be debtors under the federal bankruptcy code, but would be subject to the liquidation and insolvency provisions of applicable banking laws and regulations. If the FDIC were appointed as receiver of a banking tenant because of a tenant’s insolvency, we would become an unsecured creditor of the tenant, and be entitled to share with the other unsecured non-depositor creditors in the tenant’s assets on an equal basis after payment to the depositors of their claims. The FDIC has in the past taken the position that it has the same avoidance powers as a trustee in bankruptcy, meaning that the FDIC may try to reject the tenant’s lease with

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us. As a result, we would be unlikely to have a claim for more than the insolvent tenant’s accrued but unpaid rent owing through the date of the FDIC’s appointment as receiver. In any event, the amount paid on claims in respect of the lease would depend on, among other factors, the amount of assets of the insolvent tenant available for unsecured claims. We may recover substantially less than the full value of any unsecured claims, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

A significant portion of our properties is leased to banks, making us more economically vulnerable in the event of a downturn of the banking industry.

As of February 14, 2003, approximately 80.9% of our 2003 contractual rent, including our transactions in process, will be received from financial institutions, including regulated banks. Individual banks, as well as the banking industry in general, may be adversely affected by negative economic and market conditions throughout the United States or in the local economies in which regional banks operate. In addition, changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, may have an adverse impact on banks’ loan portfolios and allowances for loan losses. As a result, we may experience higher rates of lease default or terminations in the event of a downturn in the banking industry than we would if our tenant base were more diversified.

We acquire a substantial number of bank branches, which are specialty-use properties and therefore may be more difficult to lease to non-banks.

Bank branches are specialty-use properties that are outfitted with vaults, teller counters and other customary installations and equipment that require significant capital expenditures. Our revenue from and the value of the bank branches may be affected by a number of factors, including:

• demand from financial institutions to lease or purchase properties that are configured to operate as bank branches;

• demand from non-banking institutions to make capital expenditures to modify the specialty-use properties to suit their needs; and

• a downturn in the banking industry generally and, in particular, among smaller community banks.

These factors may have a material adverse affect on our operating results and financial condition, as well as our ability to pay dividends to shareholders, if financial institutions do not expand the number of their bank branches they operate, do not find the locations of our bank branches desirable, or elect to make capital expenditures to materially modify other properties rather than pay higher lease or acquisition prices for properties already configured as bank branches. The sale or lease of these properties to entities other than financial institutions may be difficult due to the added cost and time of refitting the properties, which we do not expect to undertake. If we are unable to lease the bank branches we acquire to financial institutions, we may be forced to sell the branches at a loss due to the repositioning expenses likely to be incurred by non-bank purchasers.

We are dependent on Bank of America and Wachovia Bank for a significant portion of our revenues and failure of these tenants to perform their obligations or renew their leases upon expiration may adversely affect our cash flow and ability to pay dividends to shareholders.

Assuming completion of our transactions in process, Bank of America, N.A. and Wachovia Bank, N.A. will represent approximately 58.4% and 16.5%, respectively, of our 2003 contractual rent and will occupy approximately 51.2% and 11.1%, respectively, of our total rentable square feet. The default, financial distress or insolvency of Bank of America or Wachovia Bank, or the failure of either of these parties to renew their leases with us upon expiration, could cause interruptions in the receipt of lease revenue from these tenants and/or result in vacancies, which would reduce our revenue and increase operating costs until the affected properties are leased, and could decrease the ultimate value of the property upon sale. We may be unable to lease the vacant property at a comparable lease rate or without incurring additional expenditures in connection with the leasing.

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Our formulated price contracts with financial institutions may require us to purchase bank branches that we otherwise would not elect to purchase and that we may be unable to lease on desirable terms or at all, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

Under our formulated price contracts, we are required, with limited exceptions, to purchase surplus bank branches that these financial institutions own. Many of the bank branches we acquire through these formulated price contracts are vacant when we are notified of our obligation to purchase, or elect to purchase, the properties. Either because the properties we are required to acquire may be unattractive or because we are required to process a large number of properties within a short time period, we cannot assure you that we will be able to lease or sublease any properties that we acquire prior to their acquisition, or at all, or that we will be able to lease or sublease properties on terms that are acceptable to us. In addition, under our formulated price contracts, we are typically restricted from permitting tenants that compete with the seller from commencing banking operations at a property during the four to six month period after the seller ceases operations at the property. This restriction could limit our ability to generate revenues from these properties in an acceptable time frame. When we enter into leases with tenants for bank branches, the tenant typically has a right to terminate its obligations under the lease if it fails to obtain the necessary approvals to operate a bank branch in the location within 60 days. The tenant’s failure to receive these types of approvals during this period, or at all, may adversely affect our ability to generate revenue from these properties.

If we fail to lease these properties, they will not generate any revenue for us, which could have a negative effect on our ability to pay dividends to our shareholders. Similarly, our ability to sublease leasehold interests that we assume is sometimes restricted. If we are unable to sublease our leasehold interests on terms that are acceptable to us, or if we cannot obtain the consent of the property owner to enter into a sublease, our operating results, cash flow and ability to pay dividends may be impaired.

Our agreements with financial institutions require us, with limited exceptions, to purchase properties on an “as is” basis and, therefore, the value of these properties may decline if we discover problems with the properties after we acquire them.

Our agreements with financial institutions require us to purchase properties on an “as is” basis. We may receive limited representations, warranties and indemnities from the sellers in connection with our acquisition of properties. If we discover issues or problems related to the physical condition of a property, zoning, compliance with ordinances and regulations or other significant problems after we acquire the property, we typically have no recourse against the seller and the value of the property may be less than the amount we paid for such property. We may incur substantial costs in repairing a property that we acquire or in ensuring its compliance with governmental regulations. These capital expenditures would reduce cash available for distribution to our shareholders. In addition, we may be unable to rent damaged or non-compliant properties on terms favorable to us, or at all.

We do not know if our tenants will renew their existing leases and, if they do not, we may be unable to lease the properties on as favorable terms, or at all, which would adversely affect our operating results and financial condition.

We cannot predict whether existing leases of our properties will be renewed at the end of their lease terms. If these leases are not renewed, we would be required to find other tenants for those properties. We cannot assure you that we would be able to enter into leases with new tenants on terms as favorable to us as the current leases or that we would be able to lease those properties at all. Our inability to enter into new leases on acceptable terms or at all could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

Our financial covenants may restrict our operating or acquisition activities, which may harm our financial condition and operating results.

The mortgages on our properties contain customary negative covenants, including provisions that may limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue

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insurance coverage. These limitations could restrict our ability to acquire additional properties. In addition, any of our future lines of credit or loans may contain additional financial covenants and other obligations. If we breach covenants or obligations in our debt agreements, the lender can generally declare a default and require us to repay the debt immediately and, if the debt is secured, can immediately take possession of the property securing the loan. In order to meet our debt service obligations, we may have to sell properties, potentially at a loss or at times that prohibit us from achieving attractive returns. Failure to pay our indebtedness when due or failure to cure events of default could result in higher interest rates during the period of the loan default and could ultimately result in the loss of properties through lender foreclosure.

We are subject to contractual obligations and covenants that may restrict our ability to dispose of our properties at attractive returns or when we otherwise desire to sell them.

Under the partnership agreement of First States Partners II, L.P., which owns the 123 South Broad Street property in Philadelphia, Pennsylvania, we are contractually restricted, until November 10, 2005, from selling or refinancing the property without the consent of the holders of a majority of the 11% minority limited partnership interests in First States Partners II, L.P. As a result of this restriction, we could be precluded from disposing of, refinancing or taking other material actions with respect to the 123 South Broad Street property during the restricted period, even if we are presented with an opportunity to dispose of or refinance the property on terms that we believe are attractive.

Moreover, with respect to the 14 office buildings we acquired from a wholly owned subsidiary of Dana Commercial Credit Corporation, we are restricted from selling any individual property in the portfolio so long as Bank of America, N.A., is a tenant in that property under the existing master lease for the portfolio.

Upon consummating the transactions contemplated by our February 14, 2003 agreement with Bank of America, N.A., we would be restricted from selling any property in the portfolio without Bank of America’s consent while Bank of America remains a tenant in that building.

In addition, pursuant to a contribution agreement under which Nicholas S. Schorsch and several other individuals and entities, of which several are our affiliates, contributed approximately $216.0 million of properties to our operating partnership in exchange for a combination of cash payments and units of our operating partnership, we are required to pay these contributing parties a tax indemnity in the event of a taxable disposition of a property contributed by them prior to an expiration date defined as the earlier of (i) September 10, 2007 and (ii) the date on which the contributing parties no longer own in the aggregate at least 25% of the units of our operating partnership issued to them in return for their contribution of property. The tax indemnity will equal the amount, if any, by which (i) the amount of the federal and state income tax liability (using an assumed combined federal and state income tax rate of 35%) incurred by the contributing parties with respect to the gain allocated to the contributing parties under Section 704(c) of the Internal Revenue Code exceeds (ii) the present value of the tax liability as of the end of the taxable year in which the disposition occurs, assuming the tax liability is not due until the end of the taxable year in which the expiration date is scheduled to occur. The discount rate to be used in the present value computation is the prime rate as announced by Wachovia Bank, N.A. at such time plus 200 basis points per annum. This tax indemnity could inhibit our disposition of properties that we may otherwise desire to sell and increase the cost of selling those properties, each of which could adversely affect our revenues.

In the future, as we acquire additional properties, we may also become subject to additional contractual obligations and covenants that may restrict our ability to dispose of our properties.

We face increasing competition for the acquisition of real estate, which may impede our ability to make future acquisitions or may increase the cost of these acquisitions.

We compete with many other entities engaged in real estate investment activities for the acquisition of properties from financial institutions, including institutional pension funds, other REITs, other public and private

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real estate companies and private real estate investors. These competitors may prevent us from acquiring desirable properties or increase the price we must pay for real estate. Our competitors may have greater resources than we do, and may be willing to pay more or may have a more compatible operating philosophy with our acquisition targets. In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties, our profitability may decrease, and you may experience a lower return on your investment. Increased competition for properties may also preclude us from acquiring those that would generate attractive returns to us.

The consideration paid for our properties may exceed fair market value, which may harm our financial condition and operating results.

Under our formulated price contracts, we are obligated to purchase properties at a formulated price based on independent appraisals using a valuation methodology that takes the vacancy of the property into account. In addition, the consideration that we pay for our properties not acquired under a formulated price contract may be based upon the current income stream from these properties or the credit quality of the tenants, and most of these acquired properties have not been purchased through a competitive bidding process. We cannot assure you that the purchase prices we pay for our properties or their appraised values will be a fair price for these properties, that we will be able to generate an acceptable return on these properties, or that the location, lease terms or other relevant economic and financial data of any properties that we acquire, including our existing portfolio, will meet risk profiles acceptable to our investors. We also may be unable to lease vacant space or renegotiate existing leases at market rates, which would adversely affect our returns on these properties. As a result, our investments in these properties may fail to perform in accordance with management’s expectations, which may substantially harm our operating results and financial condition, as well as our ability to pay dividends to shareholders.

We structure our acquisitions using complex structures often based on forecasted results for the acquisitions, and if the acquired properties underperform forecasted results, our financial condition and operating results may be harmed.

We acquire many of our properties under complex structures that we tailor to meet the specific needs of the financial institutions from which we buy properties. For instance, we may enter into sale leaseback transactions under which the sellers may vacate all or a portion of the properties we acquire following the completion of the acquisition. If we fail to accurately forecast the operating results of or the behavior of the tenants in the properties we acquire following the acquisition, our operating results and financial condition, as well as our ability to pay dividends to shareholders, may be substantially harmed.

Our acquisitions of real estate may result in disruptions to our business, may strain management resources and may result in shareholder dilution.

Our strategy includes the acquisition of or investment in real estate. These acquisitions may cause disruptions in our operations and divert management’s attention away from day-to-day operations, which could impair our relationships with our current tenants and employees. In addition, if we were to acquire real estate indirectly by acquiring another entity, we may be unable to integrate effectively the operations and personnel of the acquired business or to train, retain and motivate any key personnel from the acquired business.

We may also issue common shares, other equity securities or units of our operating partnership, as consideration for our acquisitions of properties or other assets or companies, the issuance of which could be substantially dilutive to our shareholders. In addition, our profitability may suffer because of acquisition-related costs or amortization of other intangible assets. An inability to efficiently manage our acquisition strategy could

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have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

In addition, when we enter into an acquisition, we often have limited time to complete our due diligence prior to acquiring the property. Because our internal resources are limited, we may rely on third parties to conduct a portion of our due diligence. To the extent we or these third parties underestimate or fail to identify risks and liabilities associated with the properties we acquire, we may incur unexpected liabilities or fail to perform in accordance with our projections. If this occurs, our financial condition and operating results, as well as our ability to pay dividends to shareholders, could be substantially harmed.

We rely on third parties to provide property management services for a significant number of our office buildings, and there is a risk that these third party managers or their personnel will be negligent in their performance or will default on their management obligations, which could have an adverse effect on our tenant relationships or result in unforeseen liabilities.

We have entered into agreements with third party management companies to provide property management services for a significant number of our office buildings, and we expect to enter into similar third party management agreements with respect to office buildings we acquire in the future, including the 124 office buildings we have agreed to acquire from Bank of America, N.A. We do not supervise these third party managers and their personnel on a day-to-day basis and we cannot assure you that they will manage our properties in a manner that is consistent with their obligations under our agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that these managers will not otherwise default on their management obligations to us. If any of the foregoing occurs, our relationships with our tenants could be damaged, which may prevent the tenants from renewing their leases, and we could incur liabilities resulting from loss or injury to our property or to persons at our properties, any of which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

Rising operating expenses could reduce our cash flow and funds available for future dividends.

Our properties are subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, then we could be required to expend funds for that property’s operating expenses. Our properties are also subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses.

While many of our properties are leased on a triple net lease basis or under leases that require that tenants pay a portion of the expenses associated with maintaining the properties, renewals of leases or future leases may not be negotiated on that basis, in which event we will have to pay those costs. In addition, real estate taxes on our properties and any other properties that we develop or acquire in the future may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. Many U.S. states and localities are considering increases in their income and/or property tax rates (or increases in the assessments of real estate) to cover revenue shortfalls. If we are unable to lease properties on a triple net lease basis or on a basis requiring the tenants to pay all or some of the expenses associated with maintaining the properties, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs which, could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay dividends to our shareholders.

We intend to distribute to our shareholders all or substantially all of our REIT taxable income each year so as to avoid paying corporate income tax and excise tax on our earnings and to qualify for the tax benefits

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accorded to REITs under the Internal Revenue Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected by the risk factors described in this prospectus. All distributions will be made at the discretion of our board of trustees and will depend on our earnings, our financial condition, maintenance of our REIT status and other factors that our board of trustees may deem relevant from time to time. We cannot assure you that we will be able to pay dividends in the future.

Our ability to pay dividends is based on many factors, including:

• the investment of the proceeds of this offering;

• our ability to make additional acquisitions;

• our ability to negotiate favorable lease terms;

• our tenants’ performance under their leases; and

• the fact that anticipated operating expense levels may not prove accurate, as actual results may vary substantially from estimates.

Some of these factors are beyond our control and a change in any one of these factors could affect our ability to pay future dividends. We also cannot assure you that the level of our dividends will increase over time or that contractual increases in rent under the leases of our properties or the receipt of rental revenue in connection with future acquisitions of properties will increase our actual cash available for distribution to shareholders. In the event of defaults or lease terminations by our tenants, rental payments could decrease or cease, which would result in a reduction in actual cash available for distribution. See “Dividend Policy and Distributions.”

Risks Related to the Real Estate Industry

Mortgage debt obligations expose us to increased risk of property losses, which could harm our financial condition, cash flow and ability to satisfy our other debt obligations and pay dividends.

Incurring mortgage debt increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash to pay our taxes, which may result in a decrease in cash available for distribution to our shareholders.

In addition, our default under any one of our mortgage debt obligations may increase the risk of our default on our other indebtedness. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay dividends may be harmed.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. The real estate market is affected by many factors that are beyond our control, including:

• adverse changes in national and local economic and market conditions;

• changes in interest rates and in the availability, cost and terms of debt financing;

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• changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance with laws and regulations, fiscal policies and ordinances;

• the ongoing need for capital improvements, particularly in older structures;

• changes in operating expenses; and

• civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

The costs of compliance with or liabilities under environmental laws may harm our operating results.

Our properties may be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

• our knowledge of the contamination;

• the timing of the contamination;

• the cause of the contamination; or

• the party responsible for the contamination of the property.

There may be environmental problems associated with our properties of which we are unaware. Some of our properties use, or may have used in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.

The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could nonetheless be subject to strict liability by virtue of our ownership interest, and we cannot be sure that our tenants would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to shareholders.

Since August 1998, we have maintained an environmental insurance policy on our property portfolio. The limit on our current policy is $5.0 million per occurrence and $10.0 million in the aggregate, subject to a $75,000 self insurance retention per occurrence. The policy expires in August 2003. Our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain

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insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our operating results.

All of our properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While the tenants to whom we lease properties are obligated by law to comply with the ADA provisions, and typically under our leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition and our ability to make distributions to shareholders. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

An uninsured loss or a loss that exceeds the policies on our properties could subject us to lost capital or revenue on those properties.

Under the terms and conditions of the leases currently in force on our properties, tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability and property damage insurance policies issued by companies holding general policyholder ratings of at least “A” as set forth in the most current issue of Best’s Insurance Guide. Insurance policies for property damage are generally in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements and insure against all perils of fire, extended coverage, vandalism, malicious mischief and special extended perils (“all risk,” as that term is used in the insurance industry). Insurance policies are generally obtained by the tenant providing general liability coverage varying between $1.0 million and $10.0 million depending on the facts and circumstances surrounding the tenant and the industry in which it operates. These policies include liability coverage for bodily injury and property damage arising out of the ownership, use, occupancy or maintenance of the properties and all of its appurtenant areas.

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In addition to the indemnities and required insurance policies identified above, many of our properties are also covered by flood and earthquake insurance policies obtained by and paid for by the tenants as part of their risk management programs. Additionally, we have obtained blanket liability, flood and earthquake and property damage insurance policies to protect us and our properties against loss should the indemnities and insurance policies provided by the tenants fail to restore the properties to their condition prior to a loss. All of these policies may involve substantial deductibles and certain exclusions. In certain areas, we may have to obtain earthquake insurance on specific properties as required by our lenders or by law. We have also obtained terrorism insurance on some of our larger office buildings, but this insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants and biological and chemical weapons. Should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect any market on which our common shares trade, the markets in which we operate, our operations and our profitability.

Terrorist attacks may negatively affect our operations and your investment in our common shares. We cannot assure you that there will not be further terrorist attacks against the United States or United States businesses. Some of our properties are high profile office buildings in prominent locations, or are located in areas that may be susceptible to attack, which may make these properties more likely to be viewed as terrorist targets than similar, less recognizable properties. These attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. We have obtained terrorism insurance to the maximum extent permitted by law and required by our lenders. The terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. In addition, certain losses resulting from these types of events are uninsurable and others would not be covered by our current terrorism insurance. Additional terrorism insurance may not be available at a reasonable price or at all.

The United States may enter into an armed conflict, which could have a further impact on our tenants. The consequences of any armed conflict are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.

More generally, any of these events could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Our revenues are dependent upon payment of rent by financial institutions, which are particularly vulnerable to uncertainty in the worldwide financial markets. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders, and may result in volatility in the market price for our securities.

Risks Relating to Our Residential Mortgage-Backed Securities Portfolio

Prepayment rates and changes in interest rates, or our failure to effectively hedge against interest rate changes, could negatively affect the value of our residential mortgage-backed securities.

From time to time, we intend to invest our excess cash, including a substantial portion of the cash received from this offering, indirectly in mortgage loans by purchasing residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Under a normal yield curve, an investment in fixed-rate mortgage loans or residential mortgage-backed securities will decline in value if long-term interest rates increase. A significant risk associated with investments in residential mortgage-backed securities is that both long-term and short-term interest rates will increase significantly. If long-term rates were to increase significantly, the market value of our residential mortgage-backed securities would decline and the weighted average life of the

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investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our reverse repurchase agreement borrowings. We seek to manage our exposure to interest rate volatility under our residential mortgage-backed securities portfolio by using interest rate hedging arrangements. The portfolio is funded by reverse repurchase agreements with third parties that involve risk that counterparties may fail to satisfy their obligations under these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. We hedge our reverse repurchase agreements with Eurodollar futures to reduce interest rate risk. Failure to hedge effectively against interest rate changes may adversely affect the value of our residential mortgage-backed securities portfolio or results of operations.

In addition, in the case of residential mortgage loans, there are seldom any restrictions on a borrower’s ability to prepay their loans. Homeowners tend to prepay mortgage loans faster when interest rates decline and when owners of the loans, such as us, do not want them to be prepaid. Following these prepayments, owners of the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loans when interest rates increase and when owners of the loans want them to be prepaid. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates.

Although Fannie Mae, Freddie Mac or Ginnie Mae may guarantee payments on the residential mortgage-backed securities we own directly, those guarantees do not protect us from prepayment risks or declines in market value caused by changes in interest rates.

With respect to one hedging arrangement, subject to changes in interest rates, we expect to include in interest expense, between June 2003 and September 2004, up to approximately $6.2 million, as calculated at December 31, 2002. If interest rates decrease, the anticipated charge could increase.

An increase in our borrowing costs relative to the interest we receive on our residential mortgage-backed securities may adversely affect our profitability.

We expect to earn money based upon the spread between the interest payments we receive on our residential mortgage-backed securities portfolio and the interest payments we must make on our borrowings. The interest we pay on our borrowings may increase relative to the interest we earn on our residential mortgage-backed securities. If the interest payments on our borrowings increase relative to the interest we earn on our residential mortgage-backed securities, our profitability may be adversely affected.

Use of leverage can amplify declines in market value resulting from interest rate increases.

Market values of residential mortgage-backed securities may decline without any general increase in interest rates for any number of reasons, such as increases in defaults, increases in voluntary prepayments and widening of credit spreads.

We intend to borrow funds to finance mortgage related investments, which can worsen the effect of a decline in the market value resulting from an interest rate increase. For example, assume that we borrow $85.0 million to acquire $100.0 million of 8% residential mortgage-backed securities. If prevailing interest rates increase from 8% to 9%, the value of the residential mortgage-backed securities may decline to a level below the amount required to be maintained under the terms of the borrowing. If the residential mortgage-backed securities were then sold, we would have to find funds from another source to repay the borrowing.

Risks Related to Our Organization and Structure

We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

Our future success depends, to a significant extent, upon the continued services of Nicholas S. Schorsch, our President, Chief Executive Officer and Vice Chairman of our board of trustees, and of our management team. In

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particular, the extent and nature of the relationships that Mr. Schorsch and our management team have developed with financial institutions and existing and prospective tenants is critically important to the success of our business. Although we have an employment agreement with Mr. Schorsch and other key executives, there is no guarantee that Mr. Schorsch or the other executives will remain employed with us. We do not maintain key person life insurance on any of our officers. The loss of services of one or more members of our corporate management team, particularly Mr. Schorsch, would harm our business and our prospects.

Conflicts of interest could result in an executive officer or a trustee acting other than in your best interest.

Conflicts of interest relating to the acquisition of our initial properties and operating companies in September 2002 from Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees, and several other individuals and entities affiliated or associated with us, may lead to decisions that are not in your best interest. Mr. Schorsch, Jeffrey C. Kahn, our Senior Vice President—Acquisitions and Dispositions, Shelley D. Scorsch, our Senior Vice President—Corporate Affairs and wife of Mr. Schorsch, and Henry Faulkner, III, a non-employee trustee, received, directly or indirectly through their affiliates and family members, approximately 57.9% of the total consideration received by the sellers in connection with these acquisitions. The terms of the agreements relating to these acquisitions were not negotiated in an arm’s length transaction and it is possible that we could realize less value from these acquisitions than we would have achieved had the acquisitions been entered into with an unrelated third party. Additionally, Messrs. Schorsch, Kahn and Faulkner and Ms. Schorsch have unrealized gains associated with their interests in several of these assets, and, as a result, any sale of such assets or refinancing or prepayment of principal on the indebtedness assumed by us in purchasing such assets may cause adverse tax consequences to Messrs. Schorsch, Kahn and Faulkner and Ms. Schorsch. These individuals may not be supportive of the taxable disposition or refinancing of the properties when it might otherwise be the optimal time for us to do so.

In addition, several of the sellers of these assets, including Messrs. Schorsch, Kahn and Faulkner retained an aggregate of an 11% interest in our property at 123 South Broad Street. Interests in 123 South Broad Street retained by Messrs. Schorsch, Faulkner and Kahn may also lead to conflicts of interest between us and these individuals, which could result in decisions that do not fully reflect your interests.

Some of our trustees and executive officers have other business interests that may hinder their ability to spend adequate time on our business. Mr. Schorsch and other members of management own several properties that were not transferred to our operating partnership in connection with the acquisition of our initial properties and operating companies in September 2002. Mr. Schorsch’s employment agreement permits him to continue to provide management and other services to these properties and the provision of such services may reduce the time Mr. Schorsch is able to devote to our business.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Maryland law provides that a trustee has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our declaration of trust authorizes us to indemnify our trustees and officers for actions taken by them in those capacities to the extent permitted by Maryland law. In addition, our declaration of trust limits the liability of our trustees and officers for money damages, except for liability resulting from:

• actual receipt of an improper benefit or profit in money, property or services; or

• a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist. Our bylaws require us to indemnify each trustee or officer who has been successful, on the

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merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our trustees and officers. See “Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws—Limitation of Liability and Indemnification.”

Provisions of Maryland law and our organizational documents may discourage changes in management and third party acquisition proposals and depress our share price.

Certain provisions contained in our declaration of trust and bylaws and the Maryland General Corporation Law, as applicable to Maryland REITs, may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby delay, deter or prevent a change in control of us or the removal of existing management and, as a result, could prevent shareholders from being paid a premium for their common shares over then prevailing market prices. See “Description of Shares—Restrictions on Ownership and Transfer” and “Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws.” These provisions are described below:

Our ownership limitations may restrict business combination opportunities.    To qualify as a REIT under the Internal Revenue Code, no more than 50% of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer persons during the last half of each taxable year (other than our first REIT taxable year). To preserve our REIT qualification, our declaration of trust generally prohibits direct or indirect ownership by any person of more than 9.9% of the number of outstanding shares of any class of our securities, including our common shares. Generally, common shares owned by affiliated owners will be aggregated for purposes of the ownership limitation. Any transfer of our common shares that would violate the ownership limitation will be null and void, and the intended transferee will acquire no rights in such shares. Instead, such common shares will be designated as “shares-in-trust” and transferred automatically to a trust effective on the day before the purported transfer of such shares. The beneficiary of a trust will be one or more charitable organizations named by us. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of common shares might receive a premium for their common shares over the then current market price or which such holders might believe to be otherwise in their best interests. The ownership limitation provisions also may make our common shares an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of more than 9.9% in value of our shares.

Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.    Our declaration of trust provides that a trustee may only be removed upon the affirmative vote of holders of two-thirds of our outstanding common shares. Vacancies may only be filled by the board of trustees. This requirement makes it more difficult to change our management by removing and replacing trustees. In addition, our board of trustees is divided into three classes. The initial terms of our Class I, Class II and Class III trustees will expire at the annual meeting of shareholders in each of 2003, 2004 and 2005, respectively. Trustees of each class are elected for three-year terms upon the expiration of their current terms and each year, one class of trustees will be elected by the shareholders at the annual meeting of shareholders. The staggered terms of trustees may also delay, deter or prevent a tender offer, a change in control of us or other transaction, even though such a transaction might be in the best interest of the shareholders.

Our board of trustees may approve the issuance of preferred shares with terms that may discourage a third party from acquiring us.    Our declaration of trust permits our board of trustees to issue up to 100,000,000 preferred shares, issuable in one or more classes or series. Our board of trustees may classify or reclassify any unissued preferred shares and establish the preferences and rights (including the right to vote, participate in earnings and to convert into common shares) of any such preferred shares. Thus, our board of trustees could authorize the issuance of preferred shares with terms and conditions which could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of the common shares might receive a

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premium for their shares over the then current market price of our common shares. See “Description of Shares—Power to Reclassify Shares.”

Our board of trustees may issue additional shares that may cause dilution.    Our declaration of trust authorizes the board of trustees, without shareholder approval, to:

• amend the declaration of trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class that we have the authority to issue;

• issue additional common or preferred shares, which may cause our shareholders to experience dilution; and

• classify or reclassify any unissued common shares or preferred shares and to set the preferences, rights and other terms of such classified or reclassified shares, including the issuance of preferred shares that have preference rights over the common shares with respect to dividends, liquidation, voting and other matters or common shares that have preference rights with respect to voting.

Maryland law may discourage a third party from acquiring us.    Maryland law provides broad discretion to our board of trustees with respect to its fiduciary duties in considering a change in control of our company, including that our board is subject to no greater level of scrutiny in considering a change in control transaction than with respect to any other act by our board.

The Maryland Business Combination Act restricts mergers and other business combinations between our company and an interested shareholder. An “interested shareholder” is defined as any person who is the beneficial owner of 10% or more of the voting power of our common shares and also includes any of our affiliates or associates that, at any time within the two year period prior to the date of a proposed merger or other business combination, was the beneficial owner of 10% or more of our voting power. A person is not an interested shareholder if, prior to the most recent time at which the person would otherwise have become an interested shareholder, our board of trustees approved the transaction which otherwise would have resulted in the person becoming an interested shareholder. For a period of five years after the most recent acquisition of shares by an interested shareholder, we may not engage in any merger or other business combination with that interested shareholder or any affiliate of that interested shareholder. After the five year period, any merger or other business combination must be approved by our board of trustees and by at least 80% of all the votes entitled to be cast by holders of outstanding voting shares and two-thirds of all the votes entitled to be cast by holders of outstanding voting shares other than the interested shareholder or any affiliate or associate of the interested shareholder unless, among other things, the shareholders (other than the interested shareholder) receive a minimum price for their common shares and the consideration received by those shareholders is in cash or in the same form as previously paid by the interested shareholder for its common shares. These provisions of the business combination statute do not apply to business combinations that are approved or exempted by our board of trustees prior to the time that the interested shareholder becomes an interested shareholder. However, the business combination statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer. See “Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws—Business Combinations.”

Additionally, the “control shares” provisions of the Maryland General Corporation Law are applicable to us as if we were a corporation. These provisions eliminate the voting rights of shares acquired in quantities so as to constitute “control shares,” as defined under the MGCL. Our bylaws provide that we are not bound by the control share acquisition statute. However, our board of trustees may opt to make the statute applicable to us at any time, and may do so on a retroactive basis. See “Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws—Control Share Acquisitions.”

Finally, the “unsolicited takeovers” provisions of the MGCL permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to

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implement takeover defenses that we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then current market price.

Our board of trustees may change our investment and operational policies and practices without a vote of our common shareholders, which limits your control of our policies and practices.

Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification and distributions, are determined by our board of trustees. Although we have no present intention to do so, our board of trustees may amend or revise these and other policies from time to time without a vote of our shareholders. Accordingly, our shareholders will have limited control over changes in our policies.

Although we have adopted a policy pursuant to which we plan to maintain the amount of indebtedness that we incur at an amount between 55% and 65% of our total assets, excluding our residential mortgage-backed securities portfolio, our board may amend or waive this debt policy at any time without shareholder approval and without notice to shareholders. In addition, our declaration of trust and bylaws do not limit the amount of indebtedness that we or our operating partnership may incur. Although we intend to maintain a balance between our total outstanding indebtedness and the value of our portfolio, we could alter this balance at any time. If we become highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and harm our financial condition.

Our executive officers have agreements that provide them with benefits in the event their employment is terminated following a change of control of our company.

We have entered into agreements with Messrs. Schorsch, Blumenthal, Ciorletti, Matey and Kahn and Mmes. Huffman and Schorsch that provide them with severance benefits if their employment ends under certain circumstances following a change in control of our company. These benefits could increase the cost to a potential acquiror of our company and thereby prevent or deter a change of control of the company that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders. See “Management—Employment Agreements.”

Tax Risks of our Business and Structure

Your investment in our common shares has various federal, state and local income tax risks that could affect the value of your investment.

Although the provisions of the Internal Revenue Code relevant to your investment in our common shares are generally described in “Federal Income Tax Consequences of Our Status as a REIT,” we strongly urge you to consult your own tax advisor concerning the effects of federal, state and local income tax law on an investment in our common shares, because of the complex nature of the tax rules applicable to REITs and their shareholders.

Distribution requirements imposed by law limit our flexibility in executing our business plan.

To maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our shareholders at least 90% of our REIT taxable income each year. REIT taxable income is determined without regard to the deduction for dividends paid and by excluding net capital gains. We are also required to pay tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year. In addition, we are required to pay a 4% nondeductible excise tax on the amount, if any, by which certain distributions we pay with respect to any calendar year are less than the sum of 85% of our ordinary

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income for that calendar year, 95% of our capital gain net income for the calendar year and any amount of our income that was not distributed in prior years.

We intend to distribute to our shareholders all or substantially all of our taxable REIT income each year in order to comply with the distribution requirements of the Internal Revenue Code and to avoid federal income tax and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses in arriving at REIT taxable income and the effect of required debt amortization payments could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

Our disposal of properties may have negative implications, including unfavorable tax consequences.

With limited exceptions, our formulated price contracts with financial institutions obligate us to acquire, or assume leasehold interests in, bank branches that the banks determine to be surplus and elect to sell or assign to us under these formulated price contracts. In the past, we have sold properties acquired under these formulated price contracts that we deemed to be inconsistent with the investment parameters for our real estate portfolio. We intend to continue to sell these properties.

If we make a sale of a property directly, and it is deemed to be a sale of dealer property or inventory, the sale may be deemed to be a “prohibited transaction” under federal tax laws applicable to REITs, in which case our gain from the sale would be subject to a 100% penalty tax. If we believe that a sale of a property might be treated as a prohibited transaction, we will dispose of that property through a taxable REIT subsidiary, in which case the gain from the sale would be subject to corporate income tax but not the 100% prohibited transaction tax. We cannot assure you, however, that the Internal Revenue Service would not assert successfully that sales of properties that we make directly, rather than through a taxable REIT subsidiary, were sales of dealer property or inventory, in which case the 100% penalty tax would apply.

If we fail to remain qualified as a REIT, our dividends will not be deductible by us, and our income will be subject to taxation.

We believe that we qualify as a REIT under the Internal Revenue Code, which affords us significant tax advantages. The requirements for this qualification, however, are complex and our management has limited experience in operating a REIT. If we fail to meet these requirements, our dividends will not be deductible by us and we will be subject to a corporate level tax on our taxable income. This would substantially reduce our cash available to pay dividends and your yield on your investment. In addition, incurring corporate income tax liability might cause us to borrow funds, liquidate some of our investments or take other steps which could negatively affect our operating results. Moreover, if our REIT status is terminated because of our failure to meet a REIT qualification requirement or if we voluntarily revoke our election, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost.

We may be subject to federal and state income taxes that would adversely affect our financial condition.

Even if we qualify and maintain our status as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a sale of dealer property or inventory, that income will be subject to a 100% penalty tax. In addition, we may not be able to pay sufficient distributions to avoid corporate income tax and the 4% excise tax on undistributed income. We may also be subject to state and local taxes on our income or property, either directly or at the level of our operating partnership or at the level of the other entities through which we indirectly own our properties that would adversely affect our operating results. We cannot assure you that we will be able to continue to satisfy the REIT requirements, or that it will be in our best interests to continue to do so.

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We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common shares.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a shareholder. On January 7, 2003, the President of the United States, through his administration, released a proposal that would exclude corporate dividends from an individual’s taxable income, to the extent that corporate income tax has been paid on the earnings from which the dividends are paid. REIT dividends would not be exempt from income tax in the hands of an individual shareholder because REITs’ income generally is not subject to corporate level tax. This proposal could cause shares in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs. We can make no assurance regarding the form in which this proposal ultimately will be enacted or whether it will in fact be enacted. If enacted, the proposal could have an adverse effect on the market price of our common shares.

Risks Related to This Offering

There is no public market for our common shares and the market price of our common shares could be volatile and could decline substantially following this offering.

There has not been any public market for our common shares prior to this offering. We have applied for listing of our common shares on the New York Stock Exchange in connection with this offering, but even if our shares are approved for listing, an active trading market for our common shares may never develop or be sustained. Further, the market price of our common shares could decline and you may not be able to resell your shares at or above the initial public offering price. Even if an active trading market develops, the market price of our common shares may be highly volatile and could be subject to wide fluctuations after this offering. Some of the factors that could negatively affect our share price or result in fluctuations in the price of our common shares include:

• actual or anticipated variations in our quarterly operating results or dividends;

• changes in our funds from operations or earnings estimates or publication of research reports about us or the real estate industry;

• increases in market interest rates that lead purchasers of our shares to demand a higher yield;

• changes in market valuations of similar companies;

• adverse market reaction to any increased indebtedness we incur in the future;

• additions or departures of key management personnel;

• actions by institutional shareholders;

• speculation in the press or investment community; and

• general market and economic conditions.

In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors, which could lead to a material decline in the market price of our common shares.

Currently, our common shares trade on The Portal^SM Market, a subsidiary of The Nasdaq National Market, Inc., which permits trading among qualified institutional investors of securities that are sold in private placements to qualified institutional buyers (i.e., institutional investors with at least $100 million invested in securities) and are eligible for resale in accordance with Rule 144A under the Securities Act. The last trade of our

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common shares on The Portal^SM Market occurred on February 21, 2003 at a price of $11.85 per share, which may not be indicative of the trading price of our shares on the New York Stock Exchange after this offering.

Common shares eligible for future sale may have adverse effects on our share price.

We cannot predict the effect, if any, of future sales of common shares, or the availability of shares for future sales, on the market price of our common shares. Sales of substantial amounts of common shares (including, as of February 14, 2003, up to 4,455,966 common shares issuable upon the conversion of units of our operating partnership, and, including grants to be made upon completion of this offering, up to 2,842,625 common shares issuable upon exercise of options, and 1,351,000 restricted shares, issued, or to be issued, under our 2002 Equity Incentive Plan), or the perception that these sales could occur, may adversely affect prevailing market prices for our common shares.

In addition, under several registration rights agreements, we have granted holders of our common shares issued in our September 2002 private placement and the holders of other common shares issuable upon conversion of units of our operating partnership demand and piggyback registration rights to have the resale of their shares registered under the Securities Act. In accordance with the terms of these registration rights agreements, we sent notice on January 23, 2003 to all holders of our common shares, as reflected in our books and records as of that date, of our intention to file a registration statement with the SEC for this offering and of their right to elect to participate in this offering, subject to cutback of their participation by the underwriters. As of February     , 2003, we have received notices from shareholders requesting that              common shares be included in this offering. Upon registration, these common shares will be eligible for sale into the market.

In addition, we will file with the SEC a registration statement under the Securities Act covering the resale of any of our shareholders’ common shares not included in this offering, as well as common shares issuable upon the conversion of units of our operating partnership into common shares, and will use our best commercially practicable efforts to cause this resale registration statement to be declared effective as promptly as practicable. The holders of the common shares covered by this resale registration statement will be restricted from, without the prior written consent of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., directly or indirectly offering, selling, contracting to sell or otherwise disposing of or hedging their common shares covered by the resale registration statement for 45 days following the date of this prospectus.

If any or all of these holders sell a large number of securities in the public market, the sale could reduce the trading price of our common shares and could impede our ability to raise future capital. In addition, we anticipate filing a registration statement with respect to the restricted shares and the common shares issuable upon exercise of options issued under our 2002 Equity Incentive Plan following this offering.

We also may issue from time to time additional common shares or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of common shares or the perception that these sales could occur may adversely effect the prevailing market price for our common shares. In addition, the sale of these shares could impair our ability to raise capital through a sale of additional equity securities.

You should not rely on the underwriters’ lock-up agreements to limit the number of shares sold into the market.

All of our trustees, executive officers and holders of units of our operating partnership that are convertible into common shares, and the holders of substantially all of our common shares issued in our September 2002 private placement, have agreed with our underwriters to be bound by lock-up agreements that prohibit these holders from selling or transferring their common shares or units for up to 180 days after the date of this prospectus in the case of our trustees and executive officers, and 45 days for all others subject to lock-up agreements, except in specified limited circumstances. In addition, FBR Asset Investment Corporation and

36

Friedman, Billings, Ramsey & Co., Inc. have agreed with our underwriters to be bound by lock-up agreements that prohibit them from selling or transferring their common shares or units for up to 180 days after the date of this prospectus. Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., on behalf of the underwriters, may, acting jointly, release all or any portion of the common shares or units of our operating partnership subject to the foregoing lock-up agreements, at any time and without notice or shareholder approval. In addition, the 45 day lock-up agreements that we have with the holders of our common shares issued in our September 2002 private placement will automatically terminate upon the later to occur of (i) exercise in full of the underwriters’ over-allotment option and (ii) the fifth consecutive day on which the closing price of our common shares on the New York Stock Exchange equals at least 120% of the public offering price of our common shares, or $        .

If the restrictions under the lock-up agreements are waived or terminate, approximately 42,448,999 million shares will be available for sale into the market (assuming conversion of outstanding units of our operating partnership), subject only to applicable securities rules and regulations, which could reduce the market price for our common shares.

An increase in market interest rates may have an adverse effect on the market price of our securities.

One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings that we derive from rental income with respect to our properties and our related distributions to shareholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common shares could decrease because potential investors may require a higher dividend yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

If you purchase common shares in this offering, you will experience immediate dilution.

We expect the initial public offering price of our common shares to be higher than the book value per share of our outstanding common shares. Accordingly, if you purchase common shares in this offering, you will experience immediate dilution of approximately $             in book value per share. This means that investors who purchase shares:

• will likely pay a price per share that exceeds the book value of our assets after subtracting our liabilities; and

• will have contributed, in the aggregate, approximately             % of our funding since inception, but will own only             % of our fully diluted equity interests.

Moreover, to the extent that outstanding units of our operating partnership are converted into common shares, options or warrants to purchase our common shares are exercised, or options reserved for issuance are issued and exercised, each person purchasing common shares in this offering will experience further dilution.

37

USE OF PROCEEDS

We estimate that the net proceeds of this offering will be approximately $         million, based upon the assumed price per common share of $         in this offering and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, our net proceeds will be approximately $         million. We intend to use the net proceeds from the offering as follows:

• approximately $315 million of the equity portion of the purchase price of our transactions in process, which are described below;

• to fund the equity portion of the purchase price of future acquisitions; and

• the remainder for general corporate and working capital purposes.

The following table presents information regarding the properties that we have under contract as of February 14, 2003:

Seller	Property Type	Acquisition Structure	Anticipated Closing	Number of Buildings		Rentable Square Feet		Projected Purchase Price (1)
								(in thousands)
Wachovia Bank	Bank branches	Formulated Price	March 2003	18		102,000		$	12,700
Bank of America	Bank branches	Formulated Price	March 2003	6		96,200			3,200
Pitney Bowes—Wachovia Bank	Bank branches	Sale Leaseback	March 2003	73		346,320			62,243
	Small office	Sale Leaseback	March 2003	12		457,712			47,109
	Large office	Sale Leaseback	March 2003	2		250,668			34,098
Pitney Bowes—Bank of America	Bank branches	Sale Leaseback	March 2003	98		461,216			84,037
Finova Capital—BB&T	Bank branches	Sale Leaseback	March 2003	7		48,911			4,210
	Small office	Sale Leaseback	March 2003	1		32,400			2,790
	Large office	Sale Leaseback	March 2003	2		169,497			14,600
Bank of America	Small office	Specifically Tailored	March 2003	2		44,000			2,200
Bank of America	Small office	Specifically Tailored	May 2003(2)	97	(3)	2,758,620	(3)		251,563	(3)
	Large office	Specifically Tailored	May 2003(2)	27	(3)	5,454,661	(3)		497,137	(3)
Wachovia Bank	Small office	Formulated Price(4)	July 2003	1		30,000			3,080
First States Wilmington, L.P.	Large office	Specifically Tailored	—  (5)	1		263,000			50,000
Total				347		10,515,205		$	1,068,968

(1) Includes all estimated acquisition costs.

(2) This transaction will close in stages beginning in May 2003 and is required to close no later than October 2003.

(3) Under our agreement with Bank of America, N.A., for the purchase of 124 office buildings, Bank of America has the right, during our due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and the further right, subject to our approval and to other terms and conditions, to add properties to the portfolio or to substitute properties for those currently in the portfolio. The aggregate purchase price for the portfolio will be adjusted to account for any additions, reductions or substitutions.

(4) Small office buildings may in limited circumstances be purchased under our formulated price contract with Wachovia Bank, N.A.

(5) We have an option to purchase this property at any time prior to May 24, 2007.

Pending these uses, we intend to invest the net offering proceeds in fixed- and adjustable-rate residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, or in interest-bearing, short-term investment grade securities or money market accounts that are consistent with our intention to qualify as a REIT. We may finance our investments in residential mortgage-backed securities by entering into reverse repurchase agreements to leverage the overall return on capital invested in this portfolio.

38

CAPITALIZATION

The following table sets forth:

• our actual capitalization as of December 31, 2002;

• our pro forma capitalization after adjustments to give effect to our transactions completed from January 1, 2003 through February 14, 2003. See “Our Business and Properties—Recent Developments”; and

• our pro forma capitalization, as adjusted to give effect to the sale of common shares in this offering at an offering price of $         per share, not including shares subject to the underwriters’ over-allotment option and net of the underwriting discount and estimated expenses payable by us in connection with this offering, and application of the net proceeds as described in “Use of Proceeds.”

This table should be read in conjunction with the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical and unaudited pro forma financial information and related notes included elsewhere in this prospectus. This table does not reflect the effects of any of our transactions in process.

	As of December 31, 2002
	Historical			Pro Forma for Completed Transactions(1)			Pro Forma, as Adjusted for this Offering
	(unaudited, in thousands)
Debt
Mortgage notes payable	$	149,886		$	149,886		$
Line of credit borrowings		—			—
Other indebtedness		—			200,000
Reverse repurchase agreements		1,053,529			1,053,529
Total debt		1,203,415			1,403,415
Minority interest		36,513			36,513
Shareholders’ equity
Common shares, $.001 par value per share, 500,000,000 shares authorized, 42,498,008 shares issued and outstanding as of December 31, 2002,              shares issued and outstanding, as adjusted(2)		42			42
Capital contributed in excess of par		343,389			343,389
Deferred compensation		(1,885	)		(1,885	)
Retained earnings (accumulated deficit)		(406	)		(406	)
Accumulated other comprehensive loss		(4,478	)		(4,478	)
Total shareholders’ equity		336,662			336,662
Total capitalization	$	1,576,590		$	1,776,590		$

(1) Reflects transactions completed between January 1, 2003 and February 14, 2003.

(2) Does not include the underwriters’ over-allotment option to purchase up to              common shares.

39

DILUTION

Net Tangible Book Value

As of December 31, 2002, we had a net tangible book value of approximately $331.2 million, or approximately $7.79 per share. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities and total minority interests, divided by the number of our common shares outstanding.

Dilution After This Offering

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of common shares in this offering and the net tangible book value per common share immediately after this offering. After giving effect to:

• the sale of the common shares offered by this prospectus, at an assumed initial public offering price of $         per share, and our receipt of approximately $             million in net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses;

• the issuance of 1,351,000 restricted common shares to members of our senior management team and independent trustees to be outstanding upon completion of this offering;

• the issuance of 2,842,625 common shares upon the exercise of options granted to members of our senior management team, other key employees and the Chairman of our board of trustees to be outstanding upon completion of this offering; and

• 4,455,966 common shares upon the conversion of outstanding units of our operating partnership;

our pro forma net tangible book value as of December 31, 2002 would have been approximately $             million, or $             per common share. This amount represents an immediate increase in net tangible book value of $             per share to existing shareholders prior to this offering and an immediate dilution in pro forma net tangible book value of $             per common share to new investors. The following table illustrates this per share dilution.

Assumed initial public offering price		$
Net tangible book value per share as of December 31, 2002	$
Increase in net tangible book value per share to existing shareholders attributable to new investors
Pro forma net tangible book value per share after this offering
Dilution per share to new investors		$

Differences Between New and Existing Shareholders in Number of Shares and Amount Paid

The table below summarizes, as of December 31, 2002, on the pro forma basis discussed above and excluding options to purchase 2,842,625 common shares that will be outstanding upon completion of this offering, the differences between the number of common shares purchased from us, the total consideration paid and the average price per share paid by existing shareholders and by the new investors purchasing shares in this offering. The options described in the preceding sentence are exercisable at a weighted average exercise price of $             per share and will remain outstanding upon the completion of this offering. To the extent that these outstanding options are exercised in the future, there will be further dilution to new investors. We used an assumed initial public offering price of $         per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.

	Shares Purchased Assuming No Exercise Of Underwriters’ Over-Allotment Option		Total Consideration		Average Price Per Share
	Number	Percentage	Amount	Percentage
Existing shareholders		%	$	%	$
New investors
Total		%	$	%	$

40

DIVIDEND POLICY AND DISTRIBUTIONS

We intend to continue to make regular quarterly distributions to our shareholders so that we distribute each year all or substantially all of our REIT taxable income so as to avoid paying corporate level income tax and excise tax on our earnings and to qualify for the tax benefits accorded to REITs under the Internal Revenue Code. In order to qualify as a REIT, we must distribute to our shareholders an amount at least equal to (i) 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain) plus (ii) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code less (iii) any excess non-cash income (as determined under the Internal Revenue Code). See “Federal Income Tax Consequences of Our Status as a REIT.” The dividends will be authorized by our board of trustees and declared by us based upon a number of factors, including:

• actual results of operations;

• the timing of the investment of the proceeds of this offering;

• the rent received from our tenants;

• the ability of our tenants to meet their other obligations under their leases;

• debt service requirements;

• capital expenditure requirements for our properties;

• our taxable income;

• the annual distribution requirement under the REIT provisions of the Internal Revenue Code;

• our operating expenses; and

• other factors that our board of trustees may deem relevant.

To the extent not inconsistent with maintaining our REIT status, we may retain accumulated earnings of our taxable REIT subsidiaries in those subsidiaries. Our ability to pay dividends to our shareholders will depend on our receipt of distributions from our operating partnership and lease payments from our leases with respect to our properties.

For the period from September 10, 2002 through December 31, 2002, we declared our initial dividend of $0.22 per common share, payable to shareholders of record on December 31, 2002. We distributed this dividend on January 20, 2003.

On             , 2003, we announced that we will pay a dividend of $             per common share for the quarter ending March 31, 2003 to shareholders of record on March 31, 2003. We will distribute this dividend on             , 2003.

We cannot assure you that we will continue to have cash available for dividends. See “Risk Factors.”

41

SELECTED FINANCIAL INFORMATION

The selected financial information presented below under the captions “Operating Information” and “Balance Sheet Information” as of December 31, 2002 and for the period from September 10, 2002 to December 31, 2002 are derived from the consolidated financial statements of American Financial Realty Trust. The financial information as of December 31, 2001 and for the period January 1, 2002 to September 9, 2002 and for each of the years in the three year period ended December 31, 2001 are derived from the combined financial statements of American Financial Real Estate Group, or AFREG, which is deemed to be our predecessor for accounting purposes. These financial statements have been audited by KPMG LLP, independent auditors. The consolidated balance sheet as of December 31, 2002 and the combined balance sheet as of December 31, 2001, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for the period from September 10, 2002 to December 31, 2002, and the related combined statements of operations, owners’ net investment and cash flows for the period January 1, 2002 to September 9, 2002 and for each of the years in the two year period ended December 31, 2001, and the report thereon, are included elsewhere in this prospectus. The selected financial information presented below as of and for the year ended December 31, 1998 is derived from the unaudited combined financial statements of AFREG and includes adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and results of operations as of such date and for such period under generally accepted accounting principles.

The historical financial statements of AFREG represent the combined financial condition and results of operations of the entities that previously owned our initial properties and operating companies, as well as several properties and an entity controlled by Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees, or by his wife, Shelley D. Schorsch, our Senior Vice President—Corporate Affairs, that we did not acquire in connection with our formation transactions. See “Our Business and Properties—Our Formation.” In addition, the historical financial information for AFREG included herein and set forth elsewhere in this prospectus reflects AFREG’s corporate investment strategy. Historically, AFREG often funded new acquisitions by selling properties, a strategy which we discontinued when we became a REIT. Accordingly, historical financial results are not indicative of our future performance. In addition, since the information presented below is only a summary and does not provide all of the information contained in our financial statements, including related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, including related notes, contained elsewhere in this prospectus. Pro forma information has been compiled from historical financial and other information, but does not purport to represent what our financial position or results of operations actually would have been had the transactions occurred on the dates indicated, or to project our financial performance for any future period.

42

	Pro Forma						Predecessor
	Year Ended December 31, 2002			September 10, 2002 to December 31, 2002			January 1, 2002 to September 9, 2002			Year Ended December 31,
										2001			2000			1999			1998
	(unaudited)																		(unaudited)
	(in thousands)
Operating Information:
Revenues:
Rental income	$	137,639		$	8,338		$	17,314		$	25,815		$	13,483		$	5,837		$	1,365
Operating expense reimbursements		59,258			2,813			5,577			7,663			2,085			875			29
Interest income		43,726			18,736			105			188			485			482			92
Other income		859			37			822			582			1,173			748			789
Total revenues		241,482			29,924			23,818			34,248			17,226			7,942			2,275
Expenses:
Operating expenses		91,415			3,828			7,200			9,770			5,194			2,403			211
General and administrative expenses		11,011			3,645			4,695			8,212			7,185			3,686			810
Interest expense		46,858			9,999			9,737			14,071			6,042			2,410			507
Depreciation and amortization		57,945			2,911			5,849			8,468			3,082			1,003			542
Total expenses		207,229			20,383			27,481			40,521			21,503			9,502			2,070
Income (loss) before net gains on sales of properties, realized loss on sales of investments, income tax expense, minority interest and discontinued operations		34,253			9,541			(3,663	)		(6,273	)		(4,277	)		(1,560	)		205
Net gain on sales of properties		846			846			—			4,107			8,934			4,468			—
Realized loss on sales of investments, net		(280	)		(280	)		—			—			—			—			—
Income tax expense		(131	)		(131	)		—			—			—			—			—
Income (loss) before minority interest		34,688			9,976			(3,663	)		(2,166	)		4,657			2,908			205
Minority interest		(1,597	)		(849	)		—			—			—			—			—
Income (loss) from continuing operations	$	33,091			9,127			(3,663	)		(2,166	)		4,657			2,908			205
Discontinued operations:
Income (loss) from operations, net of minority interest income					(211	)		(180	)		(114	)		499			165			(6	)
Gains on disposals, net of minority interest					28			9,500			—			—			—			—
Income (loss) from discontinued operations					(183	)		9,320			(114	)		499			165			(6	)
Net income (loss)				$	8,944		$	5,657		$	(2,280	)	$	5,156		$	3,073		$	199
Basic earnings per share:
From continuing operations				$	0.22
Discontinued operations					—
Total basic earnings per share				$	0.22
Diluted earnings per share:
From continuing operations				$	0.21
Discontinued operations					—
Total diluted earnings per share				$	0.21
Weighted average common shares outstanding (basic)					42,168
Weighted average common shares outstanding (diluted)					46,938
Dividends/distributions declared for shareholders per share and OP Unitholders per unit				$	0.22

43

					Predecessor
	Pro Forma		December 31,
	December 31, 2002		2002		2001		2000		1999			1998
	(unaudited)											(unaudited)
			(in thousands)
Balance Sheet Information:
Real estate investments, at cost	$	1,637,512	$	250,544	$	177,578	$	172,518	$	37,495		$	22,372
Cash and cash equivalents		60,842		60,842		1,597		1,806		321			305
Residential mortgage-backed securities portfolio		1,116,119		1,116,119		—		—		—			—
Total assets		2,979,773		1,605,165		183,760		182,186		48,807			31,824
Mortgage notes payable		691,494		149,886		158,587		158,700		48,728			32,397
Line of credit borrowings		80,000		—		3,791		396		400			—
Other indebtedness		200,000		—		4,754		5,093		75			—
Reverse repurchase agreements		1,053,529		1,053,529		—		—		—			—
Total debt		2,025,023		1,203,415		167,132		164,189		49,203			32,397
Total liabilities		2,053,598		1,231,990		174,611		169,670		51,245			32,759
Minority interest		36,513		36,513		—		—		—			—
Shareholders’ equity and owner’s net investment		889,662		336,662		9,149		12,516		(2,438	)		(935	)
Total liabilities and shareholders’ equity and owners’ net investment		2,979,773		1,605,165		183,760		182,186		48,807			31,824

	Pro Forma				Predecessor
	Year Ended December 31,		September 10, 2002 to December 31,		January 1, 2002 to September 9,			Year Ended December 31,
	2002		2002		2002			2001			2000			1999			1998
	(unaudited)																(unaudited)
	(in thousands)
Other Information:
Funds from operations (unaudited)(1)	$	—	$	12,778	$	—		$	—		$	—		$	—		$	—
Adjusted funds from operations (unaudited)(2)		—		12,364		—			—			—			—			—
Cash flow:
From operating activities.		—		12,594		2,382			4,587			112			(274	)		(414	)
From investing activities.		—		1,378,288		12,413			(5,745	)		(116,748	)		(11,708	)		(30,322	)
From financing activities.		—		1,426,536		(13,176	)		949			118,121			11,998			31,041

(1) Funds from operations (FFO) represents net income (loss) before minority interest in our operating partnership (computed in accordance with generally accepted accounting principles, or GAAP), excluding gains (or losses) from debt restructuring, including gains (or losses) on sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of funds from operations may differ from the methodology for calculating funds from operations utilized by other equity REITs and, accordingly, may not be comparable to other REITs. Further, funds from operations does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Funds from operations should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP.

(2) Adjusted funds from operations (AFFO) is a computation made by analysts and investors to measure a real estate company’s cash available for distribution to shareholders. AFFO is generally calculated by subtracting from or adding to FFO (i) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s properties and its revenue stream (e.g., leasing commissions and tenant improvement allowances), (ii) straightlining of rents and (iii) and amortization of deferred costs.

44

UNAUDITED PRO FORMA  CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information sets forth:

• the historical financial information as of December 31, 2002 and the year then ended derived from AFR's audited financial statements and those of AFREG;

• adjustments to give effect to the recently completed transactions;

• adjustments to give effect to the transactions in process;

• adjustments to give effect to the offering; and

• the pro forma, as adjusted, unaudited consolidated balance sheet of AFR as of December 31, 2002 and the pro forma, as adjusted, unaudited consolidated combined statement of operations of AFR and AFREG for the twelve months ended December 31, 2002 to give effect to the recently completed transactions, transactions in process and this offering.

You should read the information below along with all other financial information and analysis presented in this offering memorandum, including the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and AFR and AFREG’s combined historical financial statements and related notes included elsewhere in this offering memorandum. The unaudited pro forma consolidated financial information is presented for information purposes only, and we do not expect that this information will reflect our future results of operations or financial position. The unaudited pro forma adjustments and eliminations are based on available information and upon assumptions that we believe are reasonable. The unaudited pro forma financial information assumes that the transactions and offering were completed as of December 31, 2002 for purposes of the unaudited pro forma consolidated balance sheet and as of January 1, 2002 for purposes of the unaudited pro forma consolidated statements of operations.

45

Unaudited Pro Forma Consolidated Balance Sheet

	December 31, 2002
	Historical			Adjustments for Recently Completed Transactions(1)			Adjustments for Transactions in Process			Adjustments for Offering			Pro Forma as Adjusted
	(in thousands)
Assets:
Real estate investments, at cost
Land	$	30,079		$	57,630		$	160,345	(2)	$	—		$	248,054
Buildings and improvements		180,241			240,690			759,347	(2)		—			1,180,278
Equipment and fixtures		35,462			40,680			128,276	(2)		—			204,418
Leasehold interests		4,762			—			—			—			4,762
		250,544			339,000			1,047,968			—			1,637,512
Less: Accumulated depreciation		(15,217	)		—			—			—			(15,217	)
		235,327			339,000			1,047,968			—			1,622,295
Cash and cash equivalents		60,842			—			—			—			60,842
Restricted cash		14,010			—			—			—			14,010
Short-term investments		144,326			(139,000	)		(447,360	)		553,000	(5)		110,966
Residential mortgage-backed securities		1,116,119			—			—			—			1,116,119
Accrued interest and principal due on mortgage-backed securities		19,070			—			—			—			19,070
Accounts receivable, net		643			—			—			—			643
Accrued rental income		4,003			—			—			—			4,003
Due from affiliates		22			—			—			—			22
Prepaid expenses and other assets		4,396			—			—			—			4,396
Notes receivable		693			—			—			—			693
Assets held for sale		1,757			—			—			—			1,757
Intangible assets, net		2,413			—			21,000	(2)(3)		—			23,413
Deferred costs, net		1,544			—			—			—			1,544
Total assets	$	1,605,165		$	200,000		$	621,608		$	553,000		$	2,979,773
Liabilities and Shareholders’ Equity:
Mortgage notes payable	$	149,886		$	—		$	541,608	(4)	$	—		$	691,494
Line of credit borrowings		—			—			80,000	(4)		—			80,000
Other indebtedness		—			200,000			—			—			200,000
Reverse repurchase agreements		1,053,529			—			—			—			1,053,529
Fair value of derivative instruments		6,192			—			—			—			6,192
Accounts payable		2,533			—			—			—			2,533
Accrued expenses and other liabilities		5,776			—			—			—			5,776
Dividends payable		10,330			—			—			—			10,330
Acquired lease liability		1,268			—			—			—			1,268
Deferred revenue		1,870			—			—			—			1,870
Tenant security deposits		606			—			—			—			606
Total liabilities		1,231,990			200,000			621,608			—			2,053,598
Minority interest		36,513			—			—			—			36,513
Shareholders’ equity
Common shares and capital contributed in excess of par		343,431			—			—			553,000	(5)		896,431
Deferred compensation		(1,885	)		—			—			—			(1,885	)
Retained earnings (accumulated deficit)		(406	)		—			—			—			(406	)
Accumulated other comprehensive loss		(4,478	)		—			—			—			(4,478	)
Total shareholders’ equity		336,662			—			—			553,000			889,662
Total liabilities and shareholders’ equity	$	1,605,165		$	200,000		$	621,608		$	553,000		$	2,979,773

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(1) Reflects the January 9, 2003 acquisition of 14 large office buildings from a wholly owned subsidiary of Dana Commercial Credit Corporation and the related borrowings under a bridge loan facility.

(2) Reflects the purchase price allocation of the transactions in process, consisting of 202 bank branches, 113 small office buildings and 32 large office buildings. These properties, totaling approximately 10.5 million square feet, are as follows:

Seller	Number of Buildings	Land		Buildings and Improvements		Equipment and Fixtures		Intangible Assets
Wachovia Bank	18	$	1,905	$	9,271	$	1,524	$	—
Bank of America	6		480		2,336		384		—
Pitney Bowes-Wachovia Bank	87		21,517		101,850		17,214		2,869
Pitney Bowes-Bank of America	98		12,606		59,667		10,084		1,681
Finova Capital-BB&T	10		3,240		15,336		2,592		432
Bank of America	2		330		1,562		264		44
Bank of America	124		112,305		531,577		89,844		14,974
First States Wilmington, LP.	1		7,500		35,500		6,000		1,000
Wachovia Bank	1		462		2,248		370		—
	347	$	160,345	$	759,347	$	128,276	$	21,000

(3) Reflects purchase price allocation relating to the fair value of in place leases at the time of acquisition as well as the origination value of such in-place leases.

(4) Reflects $80.0 million of line of credit borrowings associated with the Pitney Bowes-Wachovia Bank transaction and long-term borrowings obtained to finance a portion of the transactions in process, as follows:

Pitney Bowes-Bank of America	$	60,000
Finova Capital-BB&T		14,040
Bank of America		425,568
First States Wilmington, L.P.		42,000
	$	541,608

(5) Net proceeds of this offering, calculated as follows:

Gross proceeds	$	600,000
Less:  Underwriters’ discount		(42,000	)
Other transaction costs		(5,000	)
Net proceeds	$	553,000

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Unaudited Pro Forma Consolidated Statement of Operations

	Historical			Adjustments for Completed Transactions(1)			Adjustments for Transactions in Process			Adjustments for Offering			Pro Forma as Adjusted
	(in thousands)
Revenues:
Rental income	$	8,338		$	37,831	(2)	$	91,470		$	—		$	137,639
Operating expense reimbursements		2,813			7,024			49,421			—			59,258
Investment income		—			—			—			—			—
Interest income		2,351			105			—			—			2,456
Interest income from residential mortgage-backed securities		16,385			—			—			24,885			41,270
Other income		37			822			—						859
Total revenues		29,924			45,782			140,891			24,885			241,482
Expenses:
Property operating expenses		3,828			11,135			76,452			—			91,415
General and administrative		3,645			4,695			2,671			—			11,011
Interest expense on reverse repurchase agreements		6,578			—			—			—			6,578
Interest expense on mortgages and other debt		3,421			16,937			19,922			—			40,280
Depreciation and amortization		2,911			13,101			41,933			—			57,945
Total expenses		20,383			45,868			140,978			—			207,229
Income (loss) before gain on sale of properties, income tax expense and minority interest		9,541			(86	)		(87	)		24,885			34,253
Net gain on sale of properties		846			—			—			—			846
Realized loss on sale of investments		(280	)		—			—			—			(280	)
Income tax expense		(131	)		—			—			—			(131	)
Income (loss) before minority interest		9,976			(86	)		(87	)		24,885			34,688
Minority interest		(849	)		8			4			(760	)(3)		(1,597	)
Income (loss) from continuing operations	$	9,127		$	(78	)	$	(83	)	$	24,125		$	33,091
Income per share from continuing operations:
Basic	$	0.22											$
Diluted	$	0.21											$

(1) Reflects our formation transactions (including the results of operations of our initial properties that we acquired in our formation transactions from January 1, 2002 through September 9, 2002), the December 16, 2002 acquisition of 16 small office buildings from Bank of America, net of the activity included within the historical information and the January 9, 2003 acquisition of 14 large office buildings from a wholly owned subsidiary of Dana Commercial Credit Corporation for a full year.

(2) Reflects an adjustment to straightline rental revenue.

(3) Reflects the decrease in our operating partnership’s minority interest resulting from our purchase of additional operating partner units with the net proceeds of this offering, thereby diluting the ownership interests of the minority partners.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with “Selected Financial Information,” our audited financial statements and the related notes thereto. Where appropriate, the following discussion includes analysis of American Financial Real Estate Group, or AFREG, our predecessor for accounting purposes, our formation transactions and this offering.

Overview

We are a self-managed and self-administered REIT formed in May 2002. We commenced operations in September 2002 for the purpose of acquiring and operating properties leased to financial institutions. We seek to lease our properties on a long-term, net lease basis to high credit quality tenants, resulting in attractive returns on our capital. We have focused on acquiring ownership of, or assuming leasehold interests in, office buildings and bank branches. We acquire core, surplus and underutilized real estate from financial institutions through our three acquisition structures: sale leaseback transactions, formulated price contracts and specifically tailored transactions.

The discussion below relates to our financial condition and results of operations for the period from our commencement of operations on September 10, 2002 to December 31, 2002, and the financial condition and results of operations of AFREG for the period January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000. Additionally, our results of operations and those of AFREG have been combined for the year ended December 31, 2002. The historical financial statements of AFREG represent the combined financial condition and results of operations of entities that owned the properties and the operating companies that we acquired in our formation transactions, and also include several properties and an entity controlled by Nicholas S. Schorsch, our President, Chief Executive Officer and Vice Chairman of our board of trustees, or his wife, Shelley D. Schorsch, that we did not acquire in our formation transactions. The results of operations of these properties not acquired were not material. All significant intercompany accounts and transactions have been eliminated. Our historical financial statements and those of AFREG were prepared in accordance with generally accepted accounting principles.

The historical financial statements of AFREG included in this prospectus reflect AFREG’s historical corporate investment strategy. Historically, AFREG funded new acquisitions by selling properties or by leveraging existing properties, a strategy that we discontinued when we became a REIT. While in some cases we may sell properties, we expect that, because of our status as REIT, these sales will be far less frequent than in the past. AFREG’s prior financing strategy is demonstrated in its loan-to-cost ratio of 91% as of December 31, 2001. Additionally, financial information for AFREG is presented on a different cost basis than the periods before the acquisition. Historically, AFREG often funded new acquisitions by selling properties, as displayed in the following table. Our business strategy differs from that of AFREG.

Year	Number of Properties Acquired	Aggregate Purchase Price of Properties Acquired		Number of Properties Sold	Aggregate Gross Proceeds from Sales of Properties		Aggregate Net Gain on Sales
1998	105	$	22,373,000	0	$	—	$	—
1999	33		18,825,000	16		8,418,000		4,468,000
2000	8		142,931,000	33		21,871,000		8,934,000
2001	71		24,126,000	45		22,921,000		4,107,000
2002	59		62,557,000	27		18,908,000		10,374,000
Total	276	$	270,812,000	121	$	72,118,000	$	27,883,000

We receive income from rental revenue, including tenant reimbursements, from our properties. The leases in our bank branch portfolio are predominantly triple net and bond net leases where the tenant is responsible for all

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expenses related to the operation of the property including real estate taxes, insurance, repairs and maintenance. Typically these expenses are paid directly by the tenant, and are not reflected in our statement of operations as an operating expense or an operating expense reimbursement.

Our office buildings contain a combination of triple net, bond net, gross and base year leases. Operating expenses in our office buildings typically are paid by us and billed back to the tenants on a pro-rata basis as an operating expense reimbursement. Operating expenses under gross leases are included in the base rent of the tenant, and therefore the expenses, including any increases in expenses over the base year, are paid by us. Base year leases require the tenants to pay their pro-rata share of operating expenses in excess of the tenant’s base year amount. Operating expenses for base year leases are paid by us, and to the extent they exceed the tenant’s base year amount, billed back to the tenant as an operating expense reimbursement.

We must make estimates regarding the collectability of our accounts receivable related to minimum rent, accrued rental income, expense reimbursements, and other income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable.

We earn interest income on short-term investments, restricted cash held as collateral under security and pledge agreements, escrow amounts held by the lenders providing the financing for our office buildings in accordance with the mortgage agreements and our residential mortgage-backed securities portfolio.

Since we commenced operations in September 2002, we have invested a substantial portion of our excess cash in a leveraged residential mortgage-backed securities portfolio pending deployment of this cash in real estate acquisitions. We expect to use a similar strategy with the excess proceeds from this offering, pending deployment of the proceeds as described under “Use of Proceeds” on page 38. The portfolio consists principally of adjustable-rate residential mortgage-backed securities that are fixed for three years, and then reset annually based on market rates at that time. The portfolio is funded by reverse repurchase agreements with a borrowing cost that approximates the 90 day LIBOR rate. We hedge our exposure on these reverse repurchase agreements with Eurodollar futures to reduce interest rate risk. We earn income based upon the spread between the interest payments we receive on our residential mortgage-backed securities portfolio and the interest payments we make on our borrowings, less any advisory fees.

Other income consists of fees charged to related and third parties for real estate acquisition and disposition services, real estate brokerage commissions and project management services.

Significant Accounting Estimates

Our significant accounting estimates are more fully described in Note 2 to the consolidated financial statements included in the registration statement of which this prospectus is a part. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management and, as a result, are subject to a degree of uncertainty. These significant accounting estimates include:

Revenue Recognition

Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of its respective lease reported on a straightline basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straightline basis accounting requires us to record as an asset, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Accordingly, our management must determine, in its judgment, that the unbilled rent receivable applicable to each specific tenant is collectible. We review unbilled rent receivables on a quarterly basis and

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take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of an unbilled rent receivable is in doubt, we would be required to record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable, which would have an adverse effect on our net income for the year in which the reserve is increased or the direct write-off is recorded and would decrease our total assets and shareholders’ equity.

Investments in Real Estate

Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life, or improve the efficiency, of the asset. Costs of repairs and maintenance are expensed as incurred.

Depreciation is computed using the straightline method over the estimated useful life of 40 years for buildings and improvements, five to seven years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

Effective January 1, 2002, we adopted Financial Accounting Standards Board, or FASB, Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which established a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. Statement No. 144 requires that the operations related to properties that have been sold or properties that are intended to be sold be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as “held for sale” on the balance sheet.

When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These cash flows consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.

Purchase Price Allocation

In connection with the bulk acquisition of surplus bank branches pursuant to formulated price contracts, we are required to allocate the aggregate purchase price, including transaction costs, to the individual properties and leasehold interests acquired.

We allocate a portion of the total cost to each individual property acquired on the basis of its fair value. The fair value of individual properties is determined through a combination of methods. For owned properties, fair values generally are based on independent appraisals obtained in connection with the acquisition or financing of the respective properties. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating each property’s fair value.

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The amount of the aggregate purchase price assigned to property is then allocated to land, building and equipment. This allocation is made on the basis of cost segregation studies performed by independent third party appraisers or on management’s analysis of comparable properties in the existing portfolio.

For leasehold interests acquired, fair values on favorable leases are determined based on the present value of the excess of the current market rentals, less direct costs of leasing, over the contractual lease payments. The fair values on unfavorable leases are determined based on the present value of the excess of contractual amounts over the market rentals, less direct costs of leasing. Values assigned to leasehold interests are amortized on a straightline basis over the remaining lease term.

Residential Mortgage-Backed Securities

Residential mortgage-backed security transactions are recorded on the date the securities are purchased or sold. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company accounts for its residential mortgage-backed securities portfolio totaling $1,116,119 at December 31, 2002 as available for sale. Residential mortgage-backed securities classified as available-for-sale are reported at fair value, with unrealized gains and temporary unrealized losses excluded from earnings and reported as accumulated other comprehensive income (loss). Amortization of any premium or discount related to the purchase of securities is included as a component of interest income. Realized gains or losses on the sale of residential mortgage-backed securities are determined on the specific identification method and are included in net income as net gains or losses on sales of securities. Unrealized losses on residential mortgage-backed securities that are determined to be other than temporary are recognized through the income statement. Management regularly reviews its investment portfolio for other than temporary market value declines on individual securities. There were no such adjustments for residential mortgage-backed securities during the period ended December 31, 2002.

Income from investments in residential mortgage-backed securities is recognized using the effective interest method, using the expected yield over the life of the investment. Income includes contractual interest accrued and the amortization of any premium or discount recorded upon purchase. Changes in anticipated yields result primarily from changes in actual and projected cash flows and estimated prepayments. Changes in the yields that result from changes in the anticipated cash flows and prepayments are recognized over the remaining life of the investment with recognition of a cumulative catch-up at the date of change from the date of original investment.

We are exposed to the risk of credit losses on our residential mortgage-backed securities portfolio. We limit our exposure to credit losses on our portfolio of residential mortgage-backed securities by purchasing securities issued and guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The payments of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by those respective agencies and the payment of principal and interest on the Ginnie Mae mortgage-backed securities is backed by the full-faith-and-credit of the U.S. government. The financing of the residential mortgage-backed securities through reverse repurchase agreements exposes us to the risk that margin calls will be made and that we may not be able to meet those margin calls which could result in our selling the residential mortgage-backed securities at a loss to cover these margin calls.

Accounting for Derivative Financial Investments and Hedging Activities

We account for our derivative and hedging activities using SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires all derivative instruments to be carried at fair value on the balance sheet.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. Cash flow hedges are

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accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Amounts are reclassified from other comprehensive income to the income statements in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS 133. We are not party to any derivatives designated as fair value hedges.

Under cash flow hedges, derivative gains and losses not considered highly effective in hedging the change in expected cash flows of the hedged item are recognized immediately in the income statement. We use Eurodollar futures contracts in cash flow hedge transactions. The Eurodollar futures contracts are designed to be highly effective in offsetting changes in the cash flows related to the hedged liability. For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.

Results of Operations

AMERICAN FINANCIAL REALTY TRUST

Consolidated and Combined Income Statement Data

(in thousands, except per share data)

										Year ended December 31,
	Period from September 10, 2002 to December 31,			Period from January 1, 2002 to September 9,			Combined Year ended December 31, 2002(1)
	2002			2002						2001			2000
							(unaudited)
Revenues:
Rental income	$	8,338		$	17,314		$	25,652		$	25,815		$	13,483
Operating expense reimbursements		2,813			5,577			8,390			7,663			2,085
Interest income
Interest income		2,351			105			2,456			188			485
Interest income from residential mortgage-backed securities, net of expenses of $918		16,385			—			16,385			—			—
Other income		37			822			859			582			1,173
Total revenues		29,924			23,818			53,742			34,248			17,226
Expenses:
Property operating expenses		3,828			7,200			11,028			9,770			5,194
General and administrative expenses		3,645			4,695			8,340			8,212			7,185
Interest expense on reverse repurchase agreements		6,578			—			6,578			—			—
Interest expense on mortgages and other debt		3,421			9,737			13,158			14,071			6,042
Depreciation and amortization		2,911			5,849			8,760			8,468			3,082
Total expenses		20,383			27,481			47,864			40,521			21,503
Income (loss) before net gain on sales of properties, realized loss on sales of investments, income tax expense, minority interest and discontinued operations		9,541			(3,663	)		5,876			(6,273	)		(4,277	)
Net gain on sales of properties		846			—			846			4,107			8,934
Realized loss on sales of investments, net		(280	)		—			(280	)		—			—
Income tax expense		(131	)		—			(131	)		—			—
Income (loss) before minority interest		9,976			(3,663	)		6,313			(2,166	)		4,657
Minority interest		(849	)		—			(849	)		—			—
Income (loss) before discontinued operations		9,127			(3,663	)		5,464			(2,166	)		4,657
Discontinued operations:
Income (loss) from operations, net of minority interest income of $22 from September 10, 2002 to December 31, 2002		(211	)		(180	)		(391	)		(114	)		499
Gains on disposals, net of minority interest expense of $3 from September 10, 2002 to December 31, 2002		28			9,500			9,528			—			—
Income (loss) from discontinued operations		(183	)		9,320			9,137			(114	)		499
Net income (loss)	$	8,944		$	5,657		$	14,601		$	(2,280	)	$	5,156

(1) These amounts represent the unaudited combined results of operations for the year ended December 31, 2002 which management believes makes for the most meaningful comparison to the prior year information. As discussed in Note 2 to our financial statements, the periods before and after September 10, 2002 are presented on a different basis of accounting. Accordingly, certain line items, such as rental income and depreciation and amortization expense, may not be comparable to the prior period.

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We have not included any comparison of the period from our commencement of operations on September 10, 2002 to December 31, 2002, as we do not believe that there is a prior period with respect to which a comparison would be meaningful.

Comparison of Combined Year Ended December 31, 2002 and Year Ended December 31, 2001

Revenue

Rental income decreased approximately $163,000, or 0.6%, to approximately $25.7 million for the year ended December 31, 2002 from approximately $25.8 million for the year ended December 31, 2001. The decrease was attributable to the loss of revenue from properties owned by AFREG that we did not acquire in our formation transactions. This decrease was partially offset by revenues received from rent on properties we acquired following our formation transactions with the proceeds of our September 2002 private placement.

Operating expense reimbursements increased approximately $727,000, or 9.5%, to approximately $8.4 million for the year ended December 31, 2002 from approximately $7.7 million for the year ended December 31, 2001. This increase was due to higher real estate taxes at 123 South Broad Street, additional insurance premiums for terrorism coverage, increases in utilities and operating expenses of properties we acquired following our formation transactions with the proceeds of our September 2002 private placement.

Interest income from investments (other than investments in our residential mortgage-backed securities portfolio) increased approximately $2.3 million, to approximately $2.5 million for the year ended December 31, 2002 from approximately $188,000 for the year ended December 31, 2001. This increase was due to interest income generated on investments made with the proceeds of our September 2002 private placement.

Interest income from our residential mortgage-backed securities portfolio was approximately $16.4 million for the year ended December 31, 2002. We did not invest in residential mortgage-backed securities prior to 2002. Interest income from our residential mortgage-backed securities portfolio is net of investment advisory expenses paid to a third party for services rendered in connection with this portfolio.

Other income increased approximately $277,000, or 47.6%, to approximately $859,000 for the year ended December 31, 2002 from approximately $582,000 for the year ended December 31, 2001. This increase was due to commission income earned in 2002 by our wholly owned subsidiary, Strategic Alliance Realty LLC, which was partially offset by a reduction in accounting and support service fees charged by AFREG.

Expenses

Total expenses increased approximately $7.3 million, or 18.1%, to approximately $47.9 million for the year ended December 31, 2002 from approximately $40.5 million for the year ended December 31, 2001. This increase resulted primarily from the initial incurrence of interest expense on reverse repurchase agreements and an increase in property operating expenses, partially offset by decreases in general and administrative expenses and interest expense.

Property operating expenses increased approximately $1.3 million, or 12.9%, to approximately $11.0 million for the year ended December 31, 2002 from approximately $9.8 million for the year ended December 31, 2001. This increase was due to higher real estate taxes, additional insurance premiums for terrorism insurance, leasehold rent expense for leases assumed during 2002 and additional expenses associated with properties acquired with the proceeds of our September 2002 private placement.

General and administrative expenses decreased approximately $128,000, or 1.6%, to approximately $8.2 million for the year ended December 31, 2002 from approximately $8.3 million for the year ended December 31, 2001. This decrease was due to lower bad debt expense, decreased professional fees and the absence during 2002 of organizational costs incurred during 2001 in connection with the formation of First States Holdings, L.P. This decrease was partially offset by increases in compensation for additional personnel we hired following our September 2002 private placement.

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Interest expense on reverse repurchase agreements was approximately $6.6 million for the year ended December 31, 2002 and represents interest expense on borrowings incurred in connection with our residential mortgage-backed securities portfolio. We did not have this portfolio during 2001.

Interest expense on mortgages and other debt decreased approximately $913,000, or 6.5%, to approximately $13.2 million for the year ended December 31, 2002 from approximately $14.1 million for the year ended December 31, 2001. This decrease was due to the repayment of the credit facility held by First States Holdings, L.P., and the elimination of interest expense relating to mortgages on properties owned by AFREG that we did not acquire in our formation transactions.

Depreciation and amortization expense increased approximately $292,000, or 3.4%, to approximately $8.8 million for the year ended December 31, 2002 from approximately $8.5 million for the year ended December 31, 2001. This increase was due to an increase in the cost basis of the properties we acquired in our Formation Transactions and to the depreciation expense related to properties we acquired following our Formation Transactions with the proceeds of our September 2002 private placement. This increase was partially offset by the elimination of depreciation expense related to properties owned by AFREG that we did not acquire in our Formation Transactions.

Net Gain on Sales of Properties.    Net gain on sales of properties, including continuing and discontinued operations increased approximately $6.3 million, or 152.6%, to approximately $10.4 million for the year ended December 31, 2002 from approximately $4.1 million for the year ended December 31, 2001. In 2002, we sold predominantly occupied bank branch properties, whereas in 2001, we sold predominantly vacant bank branch properties.

Realized Loss on the Sale of Investments.    Realized loss on the sale of investments was approximately $280,000 for the year ended December 31, 2002 and represents aggregate losses on the sale of investments in our residential mortgage-backed securities portfolio. We did not have this portfolio during 2001.

Income Tax Expense.    Income tax expense was approximately $131,000 for the year ended December 31, 2002. This expense represents federal and state corporate income taxes due on the sale of core real estate properties sold through our taxable REIT subsidiary.

Minority Interest.    Minority interest was approximately $849,000 for the year ended December 31, 2002 and represents an allocation of net income to the owners of units of our operating partnership, First States Group, L.P., during the period from September 10, 2002 to December 31, 2002.

Comparison of Years Ended December 31, 2001 and December 31, 2000

Revenue

Rental income increased approximately $12.3 million, or 91.5%, to approximately $25.8 million for the year ended December 31, 2001 from approximately $13.5 million for the year ended December 31, 2000. This increase was primarily due to rental revenues from a full year of operations of our 123 South Broad Street, Jenkins Court and 177 Meeting Street properties acquired during the year ended December 31, 2000. This increase was partially offset by the loss of rental income from properties disposed of during 2001.

Operating expense reimbursements increased approximately $5.6 million, or 268%, to approximately $7.7 million for the year ended December 31, 2001 from approximately $2.1 million for the period ended December 31, 2000. This increase was primarily due to reimbursements associated with a full year of operations at our 123 South Broad Street, Jenkins Court and 177 Meeting Street properties. This increase was partially offset by the elimination of reimbursements associated with properties disposed of during 2001.

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Interest income decreased approximately $297,000, or 61.2%, to approximately $188,000 for the year ended December 31, 2001 from approximately $485,000 for the year ended December 31, 2000. This decrease was primarily due to lower money market interest rates and a lower cash reserve balance, the latter of which resulted from our use of cash in 2001 to acquire properties.

Other income decreased by approximately $591,000, or 50.4%, to approximately $582,000 for the year ended December 31, 2001 from approximately $1.2 million for the year ended December 31, 2000. The decrease was principally due to the cessation of construction activities provided to related and third parties during 2001.

Expenses

Total expenses increased approximately $19.0 million, or 88.4%, to approximately $40.5 million for the year ended December 31, 2001 from approximately $21.5 million for the year ended December 31, 2000. This increase resulted from increases in property operating expenses, general and administrative expenses, interest expense and depreciation expense.

Property operating expenses increased approximately $4.6 million, or 88.1%, to approximately $9.8 million for the year ended December 31, 2001 from approximately $5.2 million for the year ended December 31, 2000. This increase was primarily due to expenses associated with a full year of operations of our 123 South Broad Street, Jenkins Court and 177 Meeting Street properties during 2001. This increase was partially offset by the elimination of property operating expenses associated with properties disposed of during 2001.

General and administrative expenses increased approximately $1.0 million, or 14.3%, to approximately $8.2 million for the year ended December 31, 2001 from approximately approximately $7.2 million for the year ended December 31, 2000. This increase was primarily due to $625,000 of organizational and start-up expenses associated with the formation of First States Holdings, L.P., as well as the cost of hiring additional personnel for property management, corporate and marketing functions, and employing the maintenance staff at 123 South Broad Street, for which we are partially reimbursed by the tenants at 123 South Broad Street under triple net leases. This increase was partially offset by an approximately $800,000 reduction in commissions paid by Strategic Alliance Realty LLC.

Interest expense on mortgages and other debt increased approximately $8.0 million, or 132.9%, to approximately $14.1 million for the year ended December 31, 2001 from approximately $6.1 million for the year ended December 31, 2000. This increase was primarily due to debt associated with a full year of operations of our 123 South Broad Street, Jenkins Court and 177 Meeting Street properties during 2001. This increase was partially offset by the repayment of mortgages on properties disposed of during 2001.

Depreciation and amortization expense increased approximately $5.4 million, or 174.8%, to approximately $8.5 million for the year ended December 31, 2001 from approximately $3.1 million for the year ended December 31, 2000. This increase was primarily due to a full year of operations at our 123 South Broad Street, Jenkins Court and 177 Meeting Street properties during 2001.

Net Gain on Sale of Properties.    Net gain on sale of properties was approximately $4.1 million for the year ended December 31, 2001, as compared to approximately $8.9 million for the year ended December 31, 2000. In 2001 we sold predominantly vacant bank branch properties, whereas in 2000 we sold predominantly occupied bank branch properties.

Discontinued Operations—(Loss) Income from Operations.    Loss from discontinued operations was approximately $114,000 for the year ended December 31, 2001, as compared to income from discontinued operations of approximately $499,000 for the year ended December 31, 2000. This decrease was due to 12 additional properties being classified as held for sale and the recognition of a $200,000 impairment loss related to the January 2002 sale of three bank branches acquired under one of our formulated price contracts.

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Reconciliation of Non-GAAP Financial Measures

We define funds from operations (FFO) as net income (loss) before minority interest in our operating partnership (computed in accordance with generally accepted accounting principles, or GAAP), excluding gains (or losses) from debt restructuring, including gains (or losses) on sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of funds from operations may differ from the methodology for calculating funds from operations utilized by other equity REITs and, accordingly, may not be comparable to other REITs. Further, funds from operations does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Funds from operations should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flow provided by operating activities determined in accordance with GAAP.

Adjusted funds from operations (AFFO) is a computation made by analysts and investors to measure a real estate company’s cash available for distribution to shareholders. AFFO is generally calculated by subtracting from or adding to FFO (i) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s properties and its revenue stream (e.g., leasing commissions and tenant improvement allowances), (ii) straightlining of rents and (iii) amortization of deferred costs.

Set forth below is a reconciliation of our calculations of FFO and AFFO to net income for the period from September 10, 2002 to December 31, 2002:

Funds from operations:
Net income	$	8,944
Minority interest in operating partnership		938
Depreciation and amortization		2,911
Non real estate depreciation		(15	)
Funds from operations		12,778
Funds from operations per share (diluted)	$	0.27
Adjusted funds from operations:
Funds from operations	$	12,778
Straightline rental income		(593	)
Straightline rent expense		44
Tenant improvements and leasing commissions		(134	)
Amortization of deferred costs		90
Amortization of fair market rental adjustment, net		(36	)
Amortization of deferred compensation		215
Adjusted funds from operations		12,364
Adjusted funds from operations per share (diluted)	$	0.26

Liquidity and Capital Resources

As of December 31, 2002, we had approximately $60.8 million in available cash and cash equivalents and approximately $144.3 million in short-term investments. In addition to our cash and cash-equivalents and short-term investments, our primary sources of liquidity will be the proceeds from this offering, proceeds from a credit facility we anticipate obtaining after the closing of this offering and cash provided by operations. As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the distribution requirements of the Internal Revenue Code and to avoid federal income tax and the nondeductible excise tax. We believe that our existing working capital and cash provided by operations will be sufficient to allow us to pay distributions necessary to enable us to continue to qualify as a REIT.

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Short-Term Liquidity Requirements

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:

• recurring maintenance, repairs and other operating expenses necessary to properly maintain our properties;

• property taxes and insurance expenses;

• interest expense and scheduled principal payments on outstanding indebtedness;

• capital expenditures incurred to facilitate the leasing of space at our properties, including tenant improvements and leasing commissions;

• general and administrative expenses; and

• future distributions paid to our shareholders.

Historically, we have satisfied our short-term liquidity requirements through our existing working capital and cash provided by our operations. We believe that our existing working capital, future lines of credit and cash provided by operations will continue to be sufficient to meet our short-term liquidity requirements.

There are a number of factors that could adversely affect our cash flow. An economic downturn in one or more of our markets may impede the ability of our tenants to make lease payments and may impact our ability to renew leases or lease space as leases expire. In addition, an economic downturn or recession could also lead to an increase in tenant bankruptcies or insolvencies, increases in our overall vacancy rates or declines in rental rates on new leases. In all of these cases, our cash flow would be adversely affected.

Under the terms of our triple net and bond net leases, the tenant is responsible for substantially all expenses associated with the operation of the related property, such as taxes, insurance, utilities, maintenance and capital improvements. As a result of these arrangements, we do not anticipate incurring substantial expenses in connection with most of these properties during the terms of the leases. We expect to incur operating and capital expenditures at some of our office buildings that have tenants with leases that are not triple net or bond net. These expenditures may include, among other things, parking lot improvements, roof replacements and other non-revenue enhancing capital expenditures. We also expect to incur revenue enhancing capital expenditures such as tenant improvements and leasing commissions in connection with the leasing of space in our office buildings.

We believe that our existing working capital and cash provided by operations will be sufficient to fund our costs of operations for the next 12 months. As of February 14, 2003, we have entered into contracts to acquire approximately $1.1 billion of properties. We expect to be able to fund the equity portion of the purchase price of these acquisitions through existing cash and the proceeds from this offering. We intend to fund the remaining portion of the purchase price through borrowings, which we intend to arrange in accordance with our general borrowings policies. If we identify significant additional acquisitions in the next 12 months, the equity purchase price of which exceeds proceeds raised in this offering, we may seek to obtain additional equity capital.

As of December 31, 2002, we had an aggregate of approximately $1,053.5 million in indebtedness under reverse repurchase agreements, which typically mature in 90 days, and an aggregate of approximately $1,116.1 million in residential mortgage-backed securities. A significant risk associated with investments in residential mortgage-backed securities is that both long-term and short-term interest rates will increase significantly. If long-term rates were to increase significantly, the market value of our residential mortgage-backed securities would decline and the weighted average life of the investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our reverse repurchase agreement borrowings. We seek to manage our exposure to interest rate volatility under our reverse repurchase agreements by using interest rate hedging arrangements.

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We believe that we qualify, and we intend to continue to qualify, as a REIT under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions paid to shareholders. We believe that our existing working capital and cash provided by operations will be sufficient to allow us to pay distributions necessary to enable us to continue to qualify as a REIT.

Long-Term Liquidity Requirements

Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions of properties that we pursue. Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, equity contributions from investors, long-term property mortgage indebtedness and sales of properties. In the future we will be dependent on cash generated from operations and external sources of capital, but not from sales of properties, to meet our long-term liquidity requirements.

Our properties are encumbered by mortgages aggregating approximately $149.9 million in outstanding principal amount as of December 31, 2002, all of which are secured by first liens on individual properties with an aggregate cost basis of approximately $250.5 million before accumulated depreciation. The mortgages on the properties bear interest at variable rates ranging from 6.08% to 7.79% with various terms extending to the year 2027.

Certain of the mortgage notes payable contain financial and non-financial covenants customarily found in mortgage notes, as well as a requirement that certain individual properties maintain a debt service coverage ratio of 1.10 to 1, calculated at the end of each quarter using a trailing 12 month period. As of December 31, 2002, we were in compliance with all of these covenants.

Commitments

The following table outlines the timing of payment requirements related to our commitments as of December 31, 2002:

Maturities due by Period

	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in thousands)
Mortgage notes payable—fixed rate	$	2,295	$	5,132	$	60,006	$	82,453	$	149,886
Reverse repurchase agreements		1,053,529		—		—		—		1,053,529
Operating lease commitments		1,803		3,041		2,788		9,452		17,084

We intend to refinance our mortgage notes payable as they become due or repay them if they relate to properties being sold.

We expect that the value of our residential mortgage-backed securities will be sufficient to repay the reverse repurchase agreements as they become due.

Cash Distribution Policy

We will elect to be taxed as a REIT under the Internal Revenue Code commencing as of our taxable year ended December 31, 2002. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our ordinary taxable income to our shareholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we

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distribute (in accordance with the Internal Revenue Code and applicable regulations) to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to federal income and excise taxes on our undistributed taxable income, i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder.

It is our intention to pay to our shareholders, within the time periods prescribed by the Internal Revenue Code, all or substantially all of our annual taxable income, including gains from the sale of real estate and recognized gains on sale of securities. We will continue our policy of making sufficient cash distributions to shareholders in order for us to maintain our REIT status under the Internal Revenue Code and to avoid corporate income and excise tax on undistributed income.

Cash Flows

For the period from September 10, 2002 through December 31, 2002

We have cash and cash equivalents totaling $60.8 million at December 31, 2002. During the period ended December 31, 2002, net cash provided from operating activities was $12.6 million. The level of cash flows provided by operating activities is affected by timing of receipts of rent and payment of operating and interest expenses.

Net cash used in investing activities was $1,378.3 million including (i) the purchase of residential mortgage-backed securities of $2,447.8 million, (ii) sales of residential mortgage-backed securities of $1,280.2 million, (iii) acquisitions of real estate investments, net of proceeds on sales of real estate investments of $58.8 million, (iv) receipt of principal payments on residential mortgage-backed securities of $32.7 million, (v) net purchases of short-term investments of $140.4 million, (vi) increase in restricted cash of $13.3 million and (vii) cash paid for our initial properties, net of cash acquired of $30.9 million.

Net cash provided by financing activities of $1,426.5 million included (i) proceeds from reverse repurchase agreements of $1,053.5 million, (ii) issuance of shares of beneficial interest of $378.6 million, (iii) repayment of mortgage notes payable of $0.7 million (iv) repayment on line of credit borrowings of $0.5 million and (v) repayment of other long-term debt of $4.4 million.

For the period from January 1, 2002 through September 9, 2002

For the period from January 1, 2002 to September 9, 2002, net cash provided from operating activities was $2.4 million. The level of cash flows provided by operating activities is affected by timing of receipts of rent and payment of operating and interest expenses.

Net cash from investing activities was $12.4 million and included proceeds of $14.7 million from the sale of 22 properties during the period and an increase in restricted cash of $5.7 million, partially offset by net purchases of short-term investments of $3.0 million, an investment in a limited partnership of $3.0 million, capital expenditures of $1.2 million and $0.8 million related to the acquisition of real estate investments.

Net cash used in financing activities was $13.1 million, consisting of repayment of mortgage notes payable of $20.9 million, repayment of other long-term debt of $0.3 million, payments for deferred financing costs of $0.1 million and distributions to limited partners of $3.9 million, net of proceeds from mortgage notes payable of $10.4 million, proceeds from limited partner contributions of $1.7.

For the year ended December 31, 2001

During the year ended December 31, 2001, net cash provided from operating activities was $4.6 million. The level of cash flows provided by operating activities is affected by timing of receipts of rent and payment of operating and interest expenses.

Net cash used for investing activities was $5.7 million, consisting of the acquisition of 58 bank branch properties and leasehold interests in 13 properties in 2001 for total consideration of $24.1 million, an increase in restricted cash of $2.9 million, capital expenditures of $1.1 million and net purchases of short-term investments of $0.5 million, net of proceeds of $22.9 million from the sale of 45 bank branch properties during the year.

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Net cash provided from financing activities was $0.9 million including proceeds from mortgage notes payable and other borrowings of $10.2 million, proceeds from limited partner contributions of $9.4 million, offset by repayment of mortgage notes payable of $6.9 million, repayment of other long-term debt of $0.3 million, payments for deferred financing costs of $0.9 million and distributions to limited partners of $10.6 million.

For the year ended December 31, 2002

During the year ended December 31, 2000, net cash provided from operating activities was $0.1 million. The level of cash flows provided by operating activities is affected by timing of receipts of rent and payment of operating and interest expenses.

Net cash used for investing activities was $116.7 million consisting of the acquisition of five bank branch properties and three office properties for $142.9 million, an increase in restricted cash of $1.4 million and capital expenditures of $0.6 million, net of proceeds of $21.9 million from the sale of 33 bank branch properties during the year, and proceeds from sales of short-term investments of $6.3 million.

Net cash provided from financing activities was $118.1 million including proceeds from mortgage notes payable and other borrowings of $118.2 million, proceeds from limited partner contributions of $20.9 million, offset by advances to owners of $1.2, repayments of mortgage notes payable and line of credit borrowings of $8.3 million, payments for deferred financing costs of $1.6 million and distributions to limited partners of $9.9 million.

Inflation

Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. In addition, most of our leases require the tenant to pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We are exposed to market risk as a result of our residential mortgage-backed securities portfolio and fixed-rate mortgage borrowings. We use derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors.

Market Risk Related to Residential Mortgage-Backed Securities Portfolio

We are subject to interest rate risk as a result of our residential mortgage-backed securities portfolio and the financing of these securities with reverse repurchase agreements, all of which are interest rate sensitive financial instruments. We are exposed to interest rate risk that fluctuates based on changes in the level or volatility of interest rates and mortgage prepayments and in the shape and slope of the yield curve.

Our primary risk is related to changes in both short-term and long-term interest rates, which affect us in several ways. As interest rates increase, the market value of the residential mortgage-backed securities portfolio declines, prepayment rates may slow and durations may extend. We finance our residential mortgage-backed securities portfolio with reverse repurchase agreements. If short-term interest rates increase, our profit margin in residential mortgage-backed securities may decrease.

We use Eurodollar futures contracts to hedge cash flows associated with expected borrowings under reverse repurchase agreements. At December 31, 2002, we had Eurodollar contracts with a notional amount of $555 million which were designated as hedges of cash flows associated with $555 million of reverse repurchase

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obligations during the period from June 2003 through September 2004. These Eurodollar futures contracts were reported at their fair value as a liability of $6.1 million at December 31, 2002.

The sensitivity analysis for our current residential mortgage-backed securities portfolio assumes an immediate 100 basis point move in interest rates from their actual December 31, 2002 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our residential mortgage-backed securities portfolio by $7.1 million, or 0.63%, at December 31, 2002. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our residential mortgage-backed securities by $19.9 million, or 1.15%, at December 31, 2002. As a result, the residential mortgage-backed securities portfolio generally will benefit less from a decline in interest rates and is negatively impacted by a same scale increase in interest rates. This may effectively limit an investor’s upside potential opportunity in a market rally.

Interest rates are defined by the U.S. Treasury yield curve. The changes in rates are assumed to occur instantaneously. It is further assumed that the changes in rates occur uniformly across the yield curve and that the level of LIBOR changes by the same amount as the yield curve. Actual changes in market conditions are likely to be different from these assumptions.

The change in value of the residential mortgage-backed securities portfolio incorporates assumptions regarding prepayments and forecasts prepayment speeds based, in part, on each security’s issuing agency (Fannie Mae or Freddie Mac), coupon, age, prior exposure to refinancing opportunities, the interest rate distribution of the underlying loans and an overall analysis of historical prepayment patterns under a variety of past interest rate conditions.

Market Risk Related to Fixed-Rate Debt

As of December 31, 2002, our debt included fixed-rate mortgage notes with a carrying value of $149.9 million and a fair value of $162.2 million. Changes in market interest rates on our fixed-rate debt impacts the fair value of the debt, but it has no impact on interest incurred or cash flow. The sensitivity analysis related to our fixed debt assumes an immediate 100 basis point move in interest rates from their actual December 31, 2002 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $7.0 million at December 31, 2002. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $9.5 million at December 31, 2002.

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OUR BUSINESS AND PROPERTIES

Our Company

We are the largest real estate company, and upon completion of this offering will be the only public REIT, focused solely on acquiring and operating properties leased to regulated financial institutions. As banks continue to divest their corporate real estate, we believe that our strategic relationships as well as our flexible acquisition and lease structures position us for continued growth. We seek to lease our properties on a long-term, net lease basis to high credit quality tenants, resulting in attractive returns on our capital.

We believe that our innovative approach provides banks and other financial institutions with operational flexibility and the benefits of reduced real estate exposure. We acquire both core and underutilized real estate from banks through our three acquisition structures: sale leaseback transactions, formulated price contracts and specifically tailored transactions. We believe that our recent transactions with Bank of America, Wachovia Bank, KeyBank and AmSouth Bank demonstrate our ability to cultivate strategic relationships with leading financial institutions.

Our management team has extensive experience in real estate acquisitions, financing and asset management, as well as a strong understanding of bank regulatory requirements. Since 1998, our management team has worked to acquire bank-related real estate. We believe that our real estate focus and our ability to lease space at market rates allow us to manage our real estate portfolio more effectively than major financial institutions.

By focusing on real estate occupied by banks and other financial institutions, we believe that we can acquire properties that provide stable risk-adjusted returns due to the strong credit profile of our tenants. As of February 14, 2003, 80.9% of our 2003 contractual rent, including the transactions in process described in this prospectus, will be derived from financial institutions, including regulated banks. We expect to receive, including from our transactions in process, 75.0% of our 2003 contractual rent from banks with current credit ratings of A or better as reported by Standard & Poor’s.

Since our private placement of common shares in September 2002, in which we raised net proceeds of approximately $378.6 million, we have acquired an aggregate of approximately $620.8 million of properties containing approximately 6.1 million rentable square feet, including the initial properties we acquired in the formation transactions completed at the time of our private placement. As of February 14, 2003, our portfolio consisted of 130 bank branches and 37 office buildings. In addition, as of February 14, 2003, we have entered into contracts to acquire approximately $1.1 billion of properties containing approximately 10.5 million rentable square feet.

We were formed on May 23, 2002, and are a self-managed and self-administered Maryland real estate investment trust, or REIT.

Market Opportunity

According to the FDIC, commercial banks and savings institutions in the U.S. that are FDIC-insured owned approximately $91.2 billion in operating real estate as of September 30, 2002.

We have identified two major trends that we believe will continue to generate significant opportunities to acquire core, surplus and underutilized real estate from banks and other financial institutions.

• Disposition of real estate.    We believe that banks and other financial institutions will continue to sell real estate, enter into long-term leases with the acquiror and reinvest the proceeds from these sales into their primary operating businesses.

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• Consolidation within the banking industry.    We anticipate that continued consolidation within the banking industry will create opportunities for us to acquire surplus bank branches and lease these branches to other banks that are expanding their market presence.

Through the sale of their real estate to us, we believe financial institutions may be able to:

• improve their liquidity;

• eliminate depreciation expense associated with owning real estate;

• redeploy the proceeds from these sales into their primary business; and

• increase earnings and key financial ratios.

In addition, recent accounting rules enacted by FASB effective December 31, 2002 require that companies write off the cost of unused real estate when they cease using the space. Previously, accounting standards permitted companies to avoid taking charges for unused space until they had developed a “facility exit plan.” As a result of the reduced flexibility that companies will have under the new rules in determining when they must take charges for unused space, we believe that banks and other financial institutions may have an increased desire to sell their real estate to third parties such as us and to utilize our flexible acquisition structures.

Office Buildings and Other Core Real Estate

We believe that the sale leaseback of office buildings and other core real estate by financial institutions reflects a general trend among these institutions to focus on their primary businesses and reduce their ownership and management of real estate. We believe that financial institutions are focused on the control of their real estate through long-term leases with a preferred landlord, rather than ownership. This parallels trends that have occurred in other industries, such as retail, where location and quality of real estate are key elements of the business. Many banks and other financial institutions have only recently begun to enter into sale leaseback transactions with real estate owners relating to their office buildings and other core real estate.

In addition to providing an efficient means for these companies to divest their real estate, we are able to effectively meet their occupancy needs. In our experience, many of the office buildings that we acquire from financial institutions have not been managed so as to realize the property’s full potential and may contain vacant space that we can lease either to other financial institutions or other high credit quality businesses.

Bank Branches

We acquire bank branches from banks and other sellers. At the time we acquire them, some of these bank branches are vacant and some are leased. Our strategy of acquiring surplus bank branches and leasing them to other banks is driven primarily by two main factors:

• consolidation in the banking industry, which often results in the surviving entity disposing of duplicative bank branches that have overlapping service areas; and

• ongoing sale of lower deposit level branches from the portfolios of larger banks.

Industry consolidation can be measured by the total dollar volume of mergers and acquisitions among banks, which totaled more than $508.0 billion from January 1, 1998 through January 1, 2003 according to Securities Data Corporation. Additionally, we acquire portfolios of leased bank branches from banks that seek to complete sale leaseback transactions as they focus on their primary businesses and reduce their ownership of real estate. Although the number of commercial banks and savings institutions has been declining due to consolidation, the number of bank branches in the U.S. has grown modestly as local and regional banks have been expanding their branch networks. According to the FDIC, the number of commercial banks and savings institutions that are FDIC-insured declined from 10,461 as of December 31, 1998 to 9,415 as of September 30, 2002. However, the FDIC reported that, during the same period, the number of FDIC-insured bank branches

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increased from 74,224 to 77,463. The following chart shows the total number of bank branches and other financial institutions that are FDIC-insured and operating in the United States from 1998 through 2002 as reported by the FDIC:

FDIC-Insured Financial Institutions and Bank Branches

Banks typically require minimum deposit levels at their branches to support their cost structure and to operate profitably, and often will close branches that do not meet these minimum levels. Smaller community banks are typically able to operate profitably on lower deposit levels than larger banks. In our experience, significant demand exists among smaller banks for leasing well-located branches vacated by larger banks.

In addition, although bank branches are typically considered specialty-use properties, they can be adapted for use by restaurants, law firms, accounting firms, drug stores and other commercial tenants.

Our Strategy

We seek to become the preferred landlord of leading banks and other financial institutions through the development of mutually beneficial relationships and by offering flexible acquisition structures and lease terms. We believe that this strategy gives us a competitive advantage over more traditional real estate companies in acquiring real estate owned by banks and other financial institutions. Our strategy is designed to provide us with both external and internal growth opportunities.

External Growth

We believe that the following strengths and advantages will allow us to realize significant external growth:

• Offering Flexible Acquisition Structures.    We use a variety of innovative acquisition and lease structures designed to meet the occupancy needs of banks and other financial institutions, while at the same time allowing them to improve their financial condition and operating results. We are able to tailor our acquisition structures to meet the specific needs of the seller. In addition, we acquire a range of real estate from financial institutions, including core operating properties, underutilized office buildings and surplus bank branches. Our three acquisition structures are sale leaseback transactions, formulated price contracts and specifically tailored transactions.

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As of February 14, 2003, our portfolio consisted of properties acquired from financial institutions using our three acquisition structures referred to in the following table:

Our Portfolio as of February 14, 2003

Acquisition Structure	Number of Buildings	Rentable Square Feet	Percentage of 2003 Contractual Rent
Sale leaseback transactions	15	3,763,534	58.8	%
Formulated price contracts	132	600,968	9.8
Specifically tailored transactions	20	1,624,202	31.4
Total	167	5,988,704	100.0	%

The following table presents our portfolio as of February 14, 2003 and assumes the acquisition of all of the properties described under “Our Business and Properties—Transactions in Process”:

Our Portfolio Including Transactions in Process

Acquisition Structure	Number of Buildings	Rentable Square Feet	Percentage of 2003 Contractual Rent
Sale leaseback transactions	210	5,530,258	41.8	%
Formulated price contracts	157	829,168	4.6
Specifically tailored transactions	147	10,144,483	53.6
Total	514	16,503,909	100.0	%

We use the following three acquisition structures to acquire our properties:

Sale Leaseback Transactions.    Under a sale leaseback transaction, we acquire office buildings and bank branches and lease the properties back to the seller pursuant to a triple net or bond net lease where we base rent largely upon the purchase price of the property and the credit of the tenant. Sale leasebacks offer financial institutions the opportunity to sell us their corporate real estate while continuing to occupy buildings and locations they value highly. Our leases under sale leaseback transactions are typically for an initial term of 20 years, with an option on the part of the tenant to renew for extended periods. To date, we have accomplished many of our sale leaseback transactions by acquiring portfolios of properties that were originally acquired by the sellers pursuant to sale leaseback transactions with financial institutions. In these acquisitions, we either assume the existing leases or enter into new leases with the existing tenants, typically financial institutions. We are able to participate in these transactions as a direct result of our relationships with the underlying tenants.

Sale leaseback transactions provide significant benefits to us, including the following:

• allowing us to acquire a financial institution’s valued real estate, such as a headquarters building;

• retaining the existing financial institution as a primary, long-term tenant;

• enabling us to generate predictable, consistent returns and attractive financing alternatives as a result of the long-term nature of the leases, the high credit quality of the tenants and an absence of rental set-off rights under our net leases; and

• providing us the ability to own properties debt-free at the end of the lease term due to the self-amortizing nature of the debt on the property.

Formulated Price Contracts.    Formulated price contracts offer financial institutions a method to sell us their surplus bank branches in an efficient manner during a specified period based on a formulated price. Pursuant to these agreements, we acquire, or assume leasehold interests in, the surplus bank

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branches of an institution as defined in these contracts at a formulated price generally based on independent appraisals using a valuation methodology that takes the vacancy of the property into account. If either party believes that the independent appraisal does not represent actual fair market value, then we typically will negotiate a price with the other party. If we are unable to negotiate a price with the other party, then either party may request a valuation of the property from another independent appraiser, which then will be averaged with the value from the first independent appraisal.

The bank branches are typically occupied at the time we receive notice of their availability and are typically vacant at the time we acquire them. Bank regulations require banks to notify the account holders at a branch at least 90 days before closing that branch. As a result, we generally receive more than three months notice before we are required to close on the acquisition of a property. When we know a property will be vacant at the time of acquisition, we typically begin marketing the property for lease or sublease prior to acquisition. We have enjoyed frequent success in pre-leasing properties for occupancy upon completion of the acquisition.

We are not obligated under our formulated price contracts to assume a leasehold interest from financial institutions having a duration, including renewal periods at the tenant’s discretion, of less than seven years. At times, when we assume a leasehold interest from financial institutions on a vacant property owned by a third party, we receive a payment equal to a fixed percentage of the remaining lease liability for that property. In addition, our assumption of these leases is sometimes conditioned on obtaining the consent of the landlord. If the financial institution from which we acquire the leasehold interest is not released from liability under the lease at the time we acquire it, we are required to provide security, typically through a letter of credit, for our obligations under the lease. Where a transaction requires a landlord’s consent, we frequently will obtain the consent of the landlord not only to assume the lease on the property, but also to sublease the property to other financial institutions in the future, thereby providing us with the opportunity to sublease these properties quickly.

When purchasing bank branches, either by acquiring title or assuming a leasehold interest, we are sometimes required to agree not to lease the property to a financial institution, other than the seller, for a period of time, typically not more than six months.

When we acquire a property under a formulated price contract that does not meet our portfolio criteria, we will seek to dispose of the property.

Formulated price contracts provide significant benefits to us, including:

• the ability to actively market a substantial number of properties prior to acquiring them;

• efficient and attractive tenanting options due to the appeal of the prime locations and the intrinsic value of the improvements; and

• the ability to lease properties to tenants without expending significant funds on improvements.

Specifically Tailored Transactions.    These transactions, which typically relate to the acquisition of office buildings from financial institutions and often include a partial sale leaseback with the seller, apply leasing and pricing structures that we tailor to the needs of the seller. In partial sale leaseback transactions, we acquire a property and lease a portion of it back to the seller, which becomes the anchor tenant, and lease the balance of the property to other tenants.

We typically acquire properties in specifically tailored transactions at a purchase price that is based on the cash flow to be generated from the leases to be in place at the time of the acquisition. We market and lease the vacant space in the property in accordance with our customary practices.

Specifically tailored transactions provide significant benefits to us, including:

• the opportunity to acquire properties through our relationships with financial institutions that otherwise would not be available for purchase and that have not been publicly marketed;

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• the ability to structure a transaction to provide the most economically advantageous terms for all parties;

• the opportunity to acquire properties with the potential for stable, long-term revenue;

• the ability to attract high quality tenants due to an established anchor tenant in the properties; and

• the ability to increase the value of the properties by leasing vacant space under long-term leases or renegotiate existing leases at market rates, providing increased cash flow.

• Fostering Relationships.    We currently have contractual relationships with Bank of America, KeyBank and Wachovia Bank relating to the purchase and repositioning of their bank branches. In addition, we have completed acquisitions with, and have entered into contracts to acquire properties from, six national and super-regional financial institutions, and have leased properties to over 35 financial institutions. We have also had discussions with numerous other top 100 banks, as well as smaller institutions, which we believe will generate significant opportunities to expand our business.

Our strong relationships often serve as a key element in the marketing of new properties, as these financial institutions often contact us to determine product availability in areas in which they are looking to open a new bank branch or lease office space.

We expect that we will provide financial institutions with otherwise unavailable bank branch locations to meet their specific expansion needs and with the means to efficiently dispose of underperforming real estate. In addition, we expect that these same financial institutions will provide us with a potential tenant base for our vacant properties. As we grow our network of relationships with financial institutions, we expect that our ability to leverage these relationships into mutually beneficially arrangements for all parties, including us, will continue to increase.

In order to enhance our existing relationships and our ability to develop new ones, we are in the process of increasing the size of our marketing group, which plays a primary role in building our relationship network.

• Strong Acquisition Pipeline.    As of February 14, 2003, we had entered into contracts to acquire approximately $1.1 billion of properties, including 145 office buildings and 202 bank branches, most of which we anticipate closing by the end of the second quarter of 2003. See “—Transactions in Process.” These properties contain an aggregate of approximately 10.5 million rentable square feet and are located in 19 states.

Internal Growth

We believe that our significant sources for internal growth include:

• Underutilized Real Estate.    Through our specifically tailored transactions, we often acquire properties with underutilized space at prices reflecting their current occupancy. We acquire vacant bank branches under our formulated price contracts based on independent appraisals using a valuation methodology that takes the vacancy of the property into account. Our proven ability to lease these properties to quality tenants under long-term leases provides us with the opportunity to increase cash flow from our portfolio of existing leases.

• Market Rate Leases.    Many of the leases in place on properties we acquire are below the current market rates when we acquire those properties. We seek to renegotiate short-term and below market leases to achieve longer lease terms at market rates, and we also actively manage our portfolio to achieve higher lease rates when leases on our properties expire or come up for renewal.

• Scheduled Rent Increases.     We strive to include scheduled rent increases in our leases, which provide us with reliable growth in cash flow and protection from inflation.

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Investment Criteria

In analyzing proposed acquisitions, we consider various factors including, among others, the following:

• the ability to increase rent and maximize cash flow from the properties under consideration;

• whether the properties are accretive to our per share financial measures;

• the terms of existing or proposed leases, including a comparison of current or proposed rents and market rents;

• the creditworthiness of the tenant;

• local demographics and the occupancy of and demand for similar properties in the market area, specifically population and rental trends;

• the ability to efficiently lease or sublease any vacant space;

• the ability of the property to achieve long-term capital appreciation;

• the ability of the property to produce free cash flow for distribution to our shareholders;

• the projected residual value of the property; and

• the opportunity to expand our network of relationships with financial institutions.

Our existing formulated price contracts require us to purchase individual properties as part of a larger portfolio or transaction that in some cases do not meet our investment criteria. Subject to maintaining our qualification as a REIT, we intend to dispose of such properties where we determine that a sale of a property would be in our best interests and holding the property would be inconsistent with the investment parameters for our real estate portfolio. We typically dispose of bank branches that we are unable to lease to financial institutions. Our board of trustees has approved a policy to dispose of such non-core or unwanted properties. Pursuant to that policy, we generally intend to commence our efforts to dispose of a non-core property within 30 days of acquiring that property and to dispose of each non-core property within 12 months of acquiring it. If for any reason we wish to dispose of a core property that does not meet our investment criteria or we believe that a disposition of a property might be subject to the prohibited transactions tax, we generally will dispose of the property through a taxable REIT subsidiary. In some cases, we may hold properties that we identify as candidates for sale in one or more taxable REIT subsidiaries. The disposition policy adopted by our board of trustees may be changed at any time without the consent of our shareholders.

Investment Approval Policy

We have no set limitation regarding (i) the number of properties in which we may invest, (ii) the amount or percentage of our assets that may be invested in any specific property or property type, that falls within our overall strategy of acquiring properties leased to regulated financial institutions or (iii) the concentration of our investments in any geographic area in the United States. Our board of trustees has adopted an investment approval policy pursuant to which our board must approve:

• any acquisition or joint venture that requires an equity investment of $150 million or greater or a total purchase price, including any assumed or incurred debt, of $400 million or greater; and

• any disposition of a property in which our current equity investment is $150 million or greater, or that has a sale price, including any debt assumed by the buyer, of $400 million or greater.

Financing Strategy

We use a variety of financing methods. We generally choose a financing method based upon the most attractive interest rate, repayment terms and maturity dates available in the marketplace at the time, and

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customize our financing strategy for each type of transaction. When possible, we match the maturity of the debt to the lease term on the property securing the debt. Our financing strategies include:

• Sale Leaseback Financing.    Sale leaseback properties provide unique financing opportunities as a result of the credit tenant or net lease nature of the underlying lease obligations and the rated or ratable credit of the tenants supporting those obligations. Unlike financings that rely heavily on the quality of the underlying real estate for property valuation and loan terms, our sale leaseback financings focus almost exclusively on the quality of the tenant’s credit and on the completeness of the underlying lease obligations to provide an uninterrupted source of funds for loan repayment. Sale leaseback financings frequently permit an attractive loan-to-value ratio depending on the needs and desires of the borrower. Similar to securitized mortgage financings, sale leaseback financings usually prohibit prepayment entirely or require the payment of make-whole premiums or the posting of defeasance collateral. We have obtained a commitment for a $75.0 million credit facility to provide short-term financing on sale leaseback properties. We have the ability, but not the obligation, to refinance these properties by obtaining long-term permanent credit tenant lease financing.

• Formulated Price Contract Financing.    We frequently lease surplus bank branches to banks and other financial institutions, which often provide us mortgage financing with respect to the leased property on favorable terms. Because the lender, as tenant under a long-term, triple net lease at the property, is also the primary, if not exclusive, funding source for repayment of the loan, loan underwriting issues are minimal. The lease and loan documents typically account for the relationship between the tenant and the lender by including set-off provisions that release us as the landlord/borrower from default under the loan documents to the extent that the default is attributable to the actions or inactions of the tenant/lender under the lease. In cases where we do not finance the property through the financial institution tenant, we typically obtain mortgage financing from another lender, often a financial institution with whom we have an ongoing relationship.

• Specifically Tailored Transaction Financing.    We usually finance office buildings that we acquire in specifically tailored transactions with mortgages that will be securitized individually or contributed to multiple loan securitizations, using collateralized mortgage-backed securities underwriting criteria and documentation, at fixed or variable interest rates, depending on the nature of the underlying tailored transaction. This financing structure typically contains provisions that provide for lock-out periods on prepayments, make-whole premiums or defeasance provisions, and reserves for capital expenditures and tenant improvement costs. By incorporating these restrictions in the financing structure, lenders are able to provide more advantageous loan-to-value ratios and interest rates. Mortgage financing loans that are contributed to securitizations are usually written on a non-recourse basis to the borrower, with carve-outs for fraud, misapplication of funds and other bad acts by the borrower or persons under the borrower’s control. In some cases, we use traditional non-securitized mortgage financing.

We consider a number of factors when evaluating our level of indebtedness and making financing decisions, including, among others, the following:

• the interest rate of the proposed financing;

• the extent to which the financing impacts the flexibility with which we manage our properties;

• prepayment penalties and restrictions on refinancing;

• the purchase price of properties to be acquired with debt financing;

• our long-term objectives with respect to the property;

• our target investment return;

• the terms of any existing leases;

• the credit of tenants leasing the property;

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• the estimated market value of our properties upon refinancing; and

• the ability of particular properties, and our company as a whole, to generate cash flow to cover expected debt service.

We will also consider the impact of individual financings on our corporate financial structure. Among the factors we will consider are:

• overall level of consolidated indebtedness;

• timing of debt and lease maturities;

• provisions that require recourse and cross-collateralization;

• corporate credit ratios including debt service coverage, debt to total market capitalization and debt to undepreciated assets; and

• the overall ratio of fixed- and variable-rate debt.

We intend to continue to employ our current financing methods as well as additional methods, including obtaining from banks, institutional investors or other lenders financing through lines of credit, bridge loans, and other arrangements, any of which may be unsecured or may be secured by mortgages or other interests in our properties. In addition, we may incur debt in the form of publicly or privately placed debt instruments. When possible, we seek to replace short-term sources of capital with long-term financing in which we match the maturity of the debt to the lease term on the property securing the debt.

Our indebtedness may be recourse, non-recourse or cross-collateralized. If the indebtedness is recourse, our general assets may be included in the collateral. If the indebtedness is non-recourse, the collateral will be limited to the particular property to which the indebtedness relates. In addition, we may invest in properties subject to existing loans secured by mortgages or similar liens on the properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to finance acquisitions or the redevelopment of existing properties, for general working capital or to purchase additional interests in partnerships or joint ventures. We may also incur indebtedness for other purposes when, in our opinion, it is advisable.

Real Estate Operations

Both directly and by outsourcing functions to third party service providers, we perform asset management, leasing, property management, and accounting and finance services relating to our properties.

Asset Management.    We focus on maximizing the value of our portfolio, monitoring property performance and operating costs, managing our investment opportunities and pursuing the acquisition of additional properties and, where necessary, the disposition of selected properties. Our asset management team directly oversees our entire portfolio and seeks to increase operating cash flow through aggressive oversight of our leasing, acquisition and property management functions.

Leasing.    Our leasing team is a key component of our success. Members of our leasing team have developed relationships with large financial institutions and community banks and also have significant experience in leasing to other types of tenants.

Our marketing process begins prior to acquisition of a property, when our leasing agents visit each site to determine how to most effectively market the property for leasing. For our bank branches, we regularly contact community banks and other financial institutions in our geographic target markets to determine their property needs, and we attempt to match the properties in our pipeline with the needs of these prospective tenants. For our

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office buildings, we will visit the location and seek to renegotiate and extend existing leases at market rates and identify new tenants for vacant space. We may also engage, when necessary, a local broker to begin marketing any vacancies within the property.

Property Management.    Our property management functions include the coordination and contract management of tenant improvements and building services. For our office buildings and vacant bank branches, we currently outsource all day-to-day property management functions except with respect to the properties located in the Philadelphia, PA metropolitan area. For our properties leased to tenants under triple net and bond net leases, the tenant is responsible for all such functions. As of February 14, 2003, payments received under bond net or triple net leases totaled approximately $60.7 million, or 88.2% of our 2003 contractual rent. In the future, we may open a regional management office in any area where we acquire a sufficient number of office properties.

As of January 31, 2003, our property management business managed and operated approximately 6.0 million rentable square feet of real estate. In addition to providing fully-integrated services to our tenants, we also generate additional fee revenue through our property management services.

Accounting and Finance.    We perform accounting and finance services that relate to the management of our real estate. Through our use of Timberline real estate management software, our accounting and finance team can quickly integrate a large number of properties into our portfolio without a need substantially increasing the number of employees. Our accounting and finance personnel perform management of accounts payable, collection of receivables and budgeting of our operating expenses through consultation with our asset management group. We intend to engage a qualified internal auditor prior to completion of this offering.

Our Formation

In September 2002, we completed a private placement of common shares in which we received net proceeds of approximately $378.6 million. Upon completion of the private placement, we acquired a portfolio of 87 bank branches and six office buildings from several individuals and entities, including Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees, and others affiliated or associated with us including Jeffrey C. Kahn, our Senior Vice President—Acquisitions and Dispositions, and Henry Faulkner, III, one of our trustees. We also acquired American Financial Resources Group, Inc., or AFRG, Strategic Alliance Realty Group, LLC, or Strategic Alliance, and several other affiliated entities that now provide our properties with asset management, leasing, property management and accounting and finance services. We paid an aggregate purchase price of approximately $228.0 million for these 93 properties and purchased entities. In connection with these transactions, we assumed contracts and letters of intent to purchase additional properties, subject to satisfactory completion of our due diligence, from financial institutions such as Bank of America, N.A. and Wachovia Bank, N.A., having a potential aggregate gross purchase price of approximately $256.0 million.

As part of these formation transactions, we acquired 89% of the partnership interests, including the general partnership interest, in First States Partners II, L.P., or FS Partners II, the entity which at the time of the transactions owned 123 South Broad Street property in Philadelphia, PA. Certain of the sellers in this transaction, including Nicholas S. Schorsch, Jeffrey C. Kahn, our Senior Vice President—Acquisitions and Dispositions and Henry Faulkner, III, a member of our board of trustees, continue to own an aggregate 11% limited partnership interest in FS Partners II. As part of the consideration for their 89% partnership interests, our operating partnership issued 991,205 units to the holders of the 11% partnership interest. Our operating partnership, as the owner of the general partner of FS Partners II, controls the decisions relating to the operations of FS Partners II. However, a majority of the owners of the 11% partnership interest retain the right to approve certain major transactions involving 123 South Broad Street, including its sale or refinancing.

In the event our operating partnership does not offer to purchase the 11% partnership interest within the 30 days preceding November 1, 2005, that interest will increase to a 15% partnership interest, and the partnership interest of our ownership percentage in FS Partners II will be correspondingly reduced to 85%.

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Investment Considerations

We believe that our business strategy and operating model distinguish us from other owners, operators, acquirors and developers of real estate in a number of ways, including:

• Attractive Industry.    The extensive real estate holdings of the banking industry present us with the opportunity to continue to grow our portfolio in the future. We believe that consolidation activity, the sale of underutilized real estate and other trends in the banking industry are likely to continue to result in attractive acquisition opportunities for us.

• Limited Competition.    We are the largest real estate company, and upon the completion of this offering will be the only public REIT, focused solely on acquiring and operating properties leased to regulated financial institutions. We believe that we are the first real estate company that acquires the full range of real estate from banks and other financial institutions utilizing our unique formulated price contract structure as well as sale leasebacks and specifically tailored transactions. Most of our acquisitions have not resulted from a competitive bidding process.

• High Credit Quality Tenants.    Our tenant base consists principally of banks and other financial institutions that are highly regulated and generally have strong credit profiles. As of February 14, 2003, 75.0% of our 2003 contractual rent, including our transactions in process, is expected to come from financial institutions with current credit ratings of A or better as reported by Standard & Poor’s. All of our bank tenants are subject to regulatory oversight by government agencies that impose certain minimum capital requirements and other restrictions that are intended to ensure ongoing financial viability.

• Proven Track Record.    Prior to completing our private placement in September 2002, our predecessor entities, under the leadership of our senior management team, completed approximately $650.0 million in purchase, sale and lease transactions involving 217 properties containing approximately 3.5 million rentable square feet. Since our private placement, we have acquired approximately $404.8 million of real estate containing approximately 4.6 million rentable square feet, excluding the initial properties we acquired in the formation transactions completed at the time of our private placement.

• Diversified Real Estate Strategy.    Our portfolio is diversified geographically, by asset type within the banking industry and by lease expiration. As of February 14, 2003, our portfolio included both small and large office buildings, as well as bank branches, leased to 170 different tenants in 19 states, including our two largest tenants, Bank of America, N.A. and Wachovia Bank, N.A. No more than 8.8% of our leases, based on our 2003 contractual rent, expire in any one of the next 10 years. Our business strategy includes traditional principles of diversification that we believe will help to insulate us from regional changes in economic conditions and the financial condition of specific tenants.

• Growth Strategy.    We believe that our focus on an attractive industry, our relationships and our flexible acquisition structures provide us with a strong acquisition pipeline. Through our active management and leasing efforts, we believe that we are well-positioned to maximize the value of the underutilized real estate we acquire. In addition, we aim to increase cash flow from these properties by obtaining long-term leases with scheduled rent increases.

• Stable Risk-Adjusted Returns.    Our properties are typically attractive, well-maintained assets in prime locations that we are able to lease on a long-term basis to high credit quality tenants. We typically enter into long-term triple net or bond net leases with our tenants, many of which are the sellers of the properties. As of February 14, 2003, leases representing 78.1% of our 2003 contractual rent, including our transactions in process, are scheduled to expire after 2010. In addition, we anticipate that approximately 81.7% of the 2003 contractual rent, including our transactions in process, from our leases as of February 14, 2003 will be generated from triple net and bond net leases. We believe that these types of leases generate consistent and predictable returns, protecting us from market fluctuations and increases in operating expenses.

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Our Properties

As of February 14, 2003, we owned or held leasehold interests in 167 properties located in 19 states, containing an aggregate of approximately 6.0 million rentable square feet. As of that date, the 2003 contractual rent expected from our properties was approximately $68.8 million.

The following table presents our portfolio as of February 14, 2003:

Our Portfolio as of February 14, 2003

Properties(1)	Number of Buildings	Rentable Square Feet	Percentage of 2003 Contractual Rent
Large office buildings	18	4,873,915	84.0	%
Small office buildings	19	549,444	7.2
Bank branches	130	565,345	8.8
Total	167	5,988,704	100.0	%

	Weighted Average Remaining Lease Term(2)	Occupancy Rate	Percentage of 2003 Contractual Rent from Financial Institutions		Percentage of 2003 Contractual Rent from Net Leases
Total properties	15.5 years	93.0%	89.2	%	88.2	%

(1) Large office buildings represent properties with 60,000 rentable square feet or more. Small office buildings represent properties with fewer than 60,000 rentable square feet.

(2) Weighted based on 2003 contractual rent.

The following table presents our portfolio as of February 14, 2003 and assumes the acquisition of all of our transactions in process as described in the section entitled “Our Business and Properties—Transactions in Process” below:

Our Portfolio Including Transactions in Process

Properties(1)	Number of Buildings	Rentable Square Feet	Percentage of 2003 Contractual Rent
Large office buildings	50	11,011,741	66.7	%
Small office buildings	132	3,760,784	22.8
Bank branches	332	1,731,384	10.5
Total	514	16,503,909	100.0	%

	Weighted Average Remaining Lease Term(2)	Occupancy Rate		Percentage of 2003 Contractual Rent from Financial Institutions		Percentage of 2003 Contractual Rent from Net Leases
Total properties	14.0 years	83.2	%	80.9	%	81.7	%

(1) Large office buildings represent properties with 60,000 rentable square feet or more. Small office buildings represent properties with fewer than 60,000 rentable square feet.

(2) Weighted based on 2003 contractual rent.

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We expect to receive, including from our transactions in process, 75.0% of our 2003 contractual rent from financial institutions with current credit ratings of A or better as reported by Standard & Poor’s.

Set forth below is information regarding lease expirations for our properties as of February 14, 2003:

Lease Expirations

Year of Lease Expiration	Number of Expiring Leases	2003 Contractual Rent			Percentage of 2003 Contractual Rent
2003	52	$	489,979	(1)	0.7	%
2004	31		2,351,908		3.4
2005	18		1,199,698		1.7
2006	11		909,965		1.3
2007	14		917,635		1.3
2008	9		926,261		1.3
2009	26		2,186,242		3.2
2010	5		6,080,431		8.8
2011	11		3,118,044		4.5
2012	16		3,119,458		4.5
2013	1		77,660		0.1
2014	6		559,913		0.8
2015 and thereafter	17		46,897,757		68.4

(1) Includes leases for 31 bank branches that are subject to termination by the tenant, Wachovia Bank, N.A. The related rent from these leases is not included in the 2003 contractual rent.

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Office Buildings

As of February 14, 2003, we owned 37 office buildings, which were acquired in sale leaseback and specifically tailored transactions arising out of our relationships with financial institutions. Except for 123 South Broad Street, which is composed of two condominium units which we consider to be two separate large office buildings, we own 100% of all of our owned properties. Set forth below is general information relating to our office buildings, which are grouped according to the transaction in which we acquired them.

Street Address	City and State	Rentable Square Feet	2003 Contractual Rent		Percentage Leased(1)		Percentage Leased to Primary Tenant(1)		Primary Tenant
Formation Transaction Portfolio
70 Broad Street	Red Bank, NJ	11,223	$	177,252	100.0	%	36.9	%	Sun Bank
102 Pennsylvania Avenue	Avondale, PA	7,000		106,361	100.0		50.9		US Post Office
610 Old York Road	Jenkintown, PA	172,240		2,509,786	97.3	(2)	17.7		ICG Commerce
123 S. Broad Street	Philadelphia, PA	882,586		13,564,509	97.7		69.4		Wachovia Bank
50 W. Market Street	West Chester, PA	21,300		498,403	100.0		56.3		Sovereign Bank
177 Meeting Street	Charleston, SC	59,455		1,348,614	100.0		40.2		Wachovia Bank
Bank of America Small Office Portfolio
6551 Van Nuys Boulevard	Van Nuys, CA	35,096	$	332,084	55.8	%	55.8	%	Bank of America
460 E. Altamonte Drive	Altamonte Springs, FL	31,674		123,277	23.0		23.0		Bank of America
3210 Cleveland Avenue	Ft. Myers, FL	28,809		265,620	54.4		54.4		Bank of America
2627 NW 43rd Street	Gainesville, FL	35,923		410,902	67.5		67.5		Bank of America
7347 Forest Oaks Boulevard	Spring Hill, FL	25,472		182,228	71.2		55.5		BAMA LLC
1933 E. Hillsborough	Tampa, FL	27,842		257,928	54.7		54.7		Bank of America
900 E. Prima Vista Boulevard	Tampa, FL	58,067		313,846	48.5		16.5		Dept. of Revenue
1540 Highway 138 SE	Conyers, GA	35,242		292,635	72.8		27.1		Bank of America
401 Carswell Avenue	Waycross, GA	19,056		148,360	63.0		39.7		Bank of America
619 S. Second Street	Dodge City, KS	35,765		168,878	42.5		19.8		Bank of America
35 Court Square	West Plains, MO	24,210		100,514	24.5		24.5		Bank of America
10017 E. 63rd Street	Raytown, MO	35,248		158,838	26.6		26.6		Bank of America
5905 South Virginia Street	Reno, NV	29,049		327,601	66.5		36.6		Ledcor Industries
301 S. Main Street	Pendleton, OR	25,968		160,076	36.4		36.4		Bank of America
2201 Nasa One Road	Nassau Bay, TX	32,452		499,028	97.3		72.1		Bank of America
725 Highway 290 West	Austin, TX	30,048		467,374	91.0		29.9		Bank of America
Dana Commercial Credit Corporation Portfolio(3)
730 15th Street, NW	Washington, DC	110,841	$	1,190,699	100.0	%	100.0	%	Bank of America
830 Central Avenue	St. Petersburg, FL	83,108		892,780	100.0		100.0		Bank of America
6000 Feldwood Road	College Park, GA	233,644		2,509,898	100.0		100.0		Bank of America
2059 Northlake Parkway	Tucker, GA	248,024		2,664,374	100.0		100.0		Bank of America
225 N. Calvert Street	Baltimore, MD	381,422		4,097,388	100.0		100.0		Bank of America
100 S. Charles Street	Baltimore, MD	473,324		5,084,637	100.0		100.0		Bank of America
12125 Viers Mill	Silver Springs, MD	27,557		296,028	100.0		100.0		Bank of America
4161 Piedmont Avenue	Greensboro, NC	359,652		3,863,526	100.0		100.0		Bank of America
295 Greystone Boulevard	Columbia, SC	71,962		773,045	100.0		100.0		Bank of America
3401 Columbia Pike	Arlington, VA	25,624		275,263	100.0		100.0		Bank of America
One Commercial Place	Norfolk, VA	339,904		3,651,385	100.0		100.0		Bank of America
Two Commercial Place(4)	Norfolk, VA	290,596		3,121,669	100.0		100.0		Bank of America
1111 E. Main Street(4)	Richmond, VA	540,765		5,809,115	100.0		100.0		Bank of America
8011 Villa Park	Richmond, VA	573,211		6,157,663	100.0		100.0		Bank of America

(1) Based on rentable square feet.

(2) Includes a lease with Shurgard Storage Center that is subject to various contingencies, including obtaining local permits.

(3) The portfolio is leased to Bank of America, N.A. pursuant to a master lease.

(4) This office building includes an adjacent parking structure.

Set forth below is additional information about selected office buildings listed above.

123 South Broad Street, Philadelphia, Pennsylvania.    This property, a landmark 30-story office building located in Philadelphia along the revitalized Avenue of the Arts, contains approximately 883,000 rentable square feet, of which 97.7% was leased as of February 14, 2003. The property is divided into two condominium units, which we consider to be two separate large office buildings. Unit 1 contains approximately 256,000 rentable

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square feet and is fully occupied by Wachovia Bank, N.A. pursuant to a triple net lease expiring in 2020, with an annual base rental payment of approximately $4.1 million and an option to renew for two five-year periods. Unit 2 contains approximately 610,000 rentable square feet. The largest tenants of Unit 2 are Wachovia Bank, N.A. and the law firm of Montgomery, McCracken, Walker & Rhoads, LLP. Wachovia Bank occupies 356,104 square feet of Unit 2 pursuant to a triple net lease expiring in 2010, with an option to renew for two five-year periods and an annual base rental payment of approximately $5.8 million. Montgomery McCracken leases 138,886 square feet of Unit 2 pursuant to a base year lease expiring in 2011, with an annual base rental payment of approximately $5.8 million and an option to renew for two five-year periods.

Unit 1 is subject to a mortgage loan having an outstanding balance as of December 31, 2002 of approximately $37.5 million, a 30 year amortization with a $279,000 monthly payment of principal and interest and an effective interest rate of approximately 7.8%. Prepayment of the loan is prohibited prior to October 11, 2010, unless the loan is defeased and a yield maintenance premium is paid to the lender. If the loan is not repaid by October 11, 2010, the interest rate under the loan increases to approximately 10.4%. We anticipate that the remaining outstanding principal balance of the loan at that time will be approximately $33.0 million.

Unit 2 is subject to a mortgage loan having an outstanding balance as of December 31, 2002 of $54.3 million, a 30 year amortization with a $405,127 monthly payment of principal and interest and an effective interest rate of approximately 7.6%. Prepayment of the loan is prohibited prior to October 11, 2010, unless the loan is defeased and a yield maintenance premium is paid to the lender. If the loan is not repaid by October 11, 2010, the interest rate under the loan increases to approximately 10.4%. We anticipate that the remaining outstanding principal balance of the loan at that time will be approximately $50.0 million.

We acquired this property by purchasing 89% of the partnership interests, including the general partnership interest, in First States Partners II, L.P., or FS Partners II, from a group of investors that included Nicholas S. Schorsch, Henry Faulkner, III and Jeffrey C. Kahn. See “Our Business and Properties—Our Formation.”

We have no immediate plans for the improvement or renovation of the property and intend to hold the property to lease to tenants. The table below sets forth information regarding 123 South Broad Street for each of the last three years:

Year(1)	Weighted Average Occupancy Rate		Average Rent per Square Foot
2000	98.0	%	$	15.47
2001	98.0			14.87
2002	98.0			15.87

(1) We did not own this property in 1998 and 1999 and therefore are unable to present information for those years.

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Set forth below is information regarding the tenant leases for 123 South Broad Street:

Tenant	Lease Expiration Date	Leased Square Feet	2003 Contractual Rent		Percentage of 2003 Contractual Rent
Wachovia Bank—Unit 2(1)	September 30, 2010	356,104	$	5,761,341	42.5	%
Wachovia Bank—Unit 1	September 30, 2020	255,992		4,071,780	30.0
Montgomery, McCracken, Walker & Rhoads, LLP	July 31, 2011	138,886		1,991,620	14.7
Philadelphia Mental Health(2)	July 31, 2004	43,701		662,322	4.9
McCabe, Weisberg	February 14, 2008	12,332		216,903	1.6
Domus, Inc.	May 31, 2005	10,835		180,358	1.3
Heard, Linebarger, Graham, Gogg	May 31, 2004	7,292		92,267	0.7
Nicholas Clemente	January 31, 2008	5,412		86,592	0.6
Center City Reporting	May 31, 2005	4,083		65,923	0.5
Black & Adams, PC	March 31, 2005	3,792		60,198	0.4
16 other tenants	February 28, 2003 to July 31, 2009	24,275		375,205	2.8

(1) Wachovia Bank, N.A. has a right to terminate its obligations with respect to 141,505 square feet, representing approximately $2.3 million in 2003 contractual rent, in September 2005 and with respect to 214,599 square feet, representing approximately $3.5 million in 2003 contractual rent, in September 2007. These termination rights require one year’s prior written notice and payment of a significant termination fee by Wachovia Bank.

(2) Philadelphia Mental Health lease expires in 2004; at the time of the expiration, Montgomery, McCracken, Walker & Rhoads, LLP is required to take the space.

Set forth below is information regarding lease expirations for 123 South Broad Street:

Year	Number of Expiring Leases	Total Rentable Square Feet under Expiring Leases	2003 Contractual Rent under Expiring Leases		Percentage of 2003 Contractual Rent under Expiring Leases
Month-to-month	1	2,382	$	—	—	%
2003	4	6,350		40,159	0.3
2004	7	54,956		863,233	6.4
2005	5	21,128		360,404	2.7
2006	2	3,544		67,644	0.5
2007	1	3,226		56,261	0.4
2008	3	18,657		323,581	2.4
2009	1	1,483		28,486	0.2
2010(1)	1	356,104		5,761,341	42.5
2011	1	138,886		1,991,620	14.6
2020	1	255,992		4,071,780	30.0

(1) Wachovia Bank, N.A. has a right to terminate its obligations with respect to 141,505 square feet, representing approximately $2.3 million in 2003 contractual rent, in September 2005 and with respect to 214,599 square feet, representing approximately $3.5 million in 2003 contractual rent, in September 2007. These termination rights require one year’s prior written notice and payment of a significant termination fee by Wachovia Bank.

Dana Commercial Credit Corporation Sale Leaseback Portfolio.    On January 9, 2003, we acquired from a wholly owned subsidiary of Dana Commercial Credit Corporation 14 office buildings containing approximately 3.8 million rentable square feet for an aggregate purchase price of approximately $339.3 million, consisting of cash and the repayment of debt, including a make-whole premium related thereto. The properties are located in the District of Columbia, Georgia, Florida, Maryland, North Carolina, South Carolina and Virginia, and are 100% bond net leased to Bank of America, N.A.

As part of the purchase price for these properties, we repaid debt of approximately $256.0 million in full, together with a make-whole payment of an additional $40.0 million. We funded this transaction with a $200.0 million bridge loan facility with Bank of America, N.A. and approximately $139.3 million in cash. We intend to replace the bridge loan with long-term credit tenant lease financing.

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All the properties in this portfolio are leased to Bank of America, N.A. pursuant to a master lease through 2022. Over the life of the lease, Bank of America is permitted to vacate space totaling 50.0% of the value of the portfolio based on the original purchase price paid by a wholly owned subsidiary of Dana Commercial Credit Corporation, according to the following schedule: 17.0% in 2004; 17.0% in 2009; and 16.0% in 2015. The annual rental payments under the lease are fixed at approximately $40.4 million through January 2011, regardless of the number of rentable square feet leased by Bank of America. If Bank of America does not vacate space as contemplated under the lease, it will pay an annual rent rate of 8.5% of the original purchase price allocated to that space on a triple net lease basis. Other than with respect to space that Bank of America leases from us according to this formula, from 2011 through 2022, Bank of America is not required to pay rent on the space that it continues to occupy. We intend to lease the space vacated by Bank of America to third party tenants. Rents received from these third party tenants are in addition to the approximately $40.4 million annual rent payment by Bank of America. Bank of America has subleased space in the portfolio to third party tenants. We are restricted from selling any property in the portfolio while Bank of America remains a tenant in that building.

177 Meeting Street, Charleston, South Carolina.    This property, known as the First Union Center, is prominently located at the corner of Meeting and Market Streets in the heart of the historic and business districts of Charleston. The four-story office building contains approximately 59,455 rentable square feet and is currently fully occupied by office and retail tenants under triple net leases. Wachovia Bank, N.A. occupies approximately 44.0% of the building pursuant to a triple net lease expiring in December 2020. Other principal tenants include Mass Mutual and NewSouth Communication. The property is subject to a mortgage loan having an outstanding balance as of December 31, 2002 of approximately $10.3 million, a 30 year amortization with a $73,800 monthly payment of principal and interest and an annual interest rate of approximately 7.2%. Prepayment of the loan is prohibited prior to January 11, 2011, unless the loan is defeased and a yield maintenance premium is paid to the lender. We anticipate that the remaining outstanding principal balance of the loan at that time will be approximately $9.0 million. We have no immediate plans for the improvement or renovation of the property. Set forth below is information regarding the tenant leases for 177 Meeting Street:

Tenant	Lease Expiration Date	Leased Rentable Square Feet	2003 Contractual Rent		Percentage of 2003 Contractual Rent
Wachovia Bank	December 31, 2020	22,544	$	592,562	43.9	%
Mass Mutual	March 31, 2004	12,543		244,866	18.2
NewSouth Communications Corp	November 30, 2009	7,013		131,754	9.8
Robertson and Associates	October 31, 2011	5,791		87,934	6.5
Robert Half International	October 31, 2004	3,810		71,130	5.3
Four other tenants	Ranges from month-to-month to May 31, 2007	7,754		220,368	16.3

Set forth below is information regarding lease expirations for 177 Meeting Street:

Year	Number of Expiring Leases	Total Rentable Square Feet Under Expiring Leases	2003 Contractual Rent Under Expiring Leases		Percentage of 2003 Contractual Rent Under Expiring Leases
2003	1	635	$	12,143	0.9	%
2004	2	15,003		315,996	23.4
2006	3	6,193		177,133	13.2
2007	1	926		31,093	2.3
2009	1	7,013		131,754	9.8
2011	1	5,791		87,934	6.5
2020	1	23,894		592,562	43.9

Jenkins Court, Jenkintown, Pennsylvania.    Jenkins Court is a two building property consisting of a five-story office building, a one-story building consisting of office and retail tenants and retail space connecting the two buildings. The property is located in Jenkintown, Pennsylvania, a suburb of Philadelphia. The property includes approximately 172,240 rentable square feet. The principal tenants are Morgan Stanley, Prudential Securities, ICG Commerce and Outback Steakhouse. We also lease space in Jenkins Court. The property is

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subject to a mortgage loan having an outstanding balance as of December 31, 2002 of approximately $16.1 million, a 30 year amortization with a $116,900 monthly payment of principal and interest and an effective annual interest rate of approximately 7.5%. Prepayment of the loan is prohibited prior to June 11, 2010, unless the loan is defeased and a yield maintenance premium is paid to the lender. If the loan is not paid by August 11, 2010, the interest rate under the loan increases to approximately 10.3% for the remainder of the term of the loan. We anticipate the remaining outstanding principal balance of the loan at that time will be approximately $13.7 million. We have no immediate plans for the improvement or renovation of the property and intend to hold the property to lease to tenants.

Set forth below is information regarding the tenant leases for Jenkins Court:

Tenant	Lease Expiration Date	Leased Square Feet	2003 Contractual Rent		Percentage of 2003 Contractual Rent
ICG Commerce	June 3, 2004	30,477	$	622,265	23.8	%
Morgan Stanley	January 31, 2011	22,498		553,451	21.2
Prudential Securities	May 31, 2005	14,133		342,250	13.1
Semanoff, Ormsby & Greenberg	December 31, 2006	10,500		233,310	8.9
Outback Steakhouse	October 1, 2007	6,670		102,931	3.9
Shurgard Storage Center(1)	—(2)	48,000		100,000	3.8
14 other tenants	Ranges from month-to-month to March 31, 2010	35,734		655,579	25.1

(1) The effectiveness of this lease is subject to various contingencies, including Shurgard Storage Center obtaining local permits.

(2) The lease will expire 20 years after its effective date.

Set forth below is information regarding lease expirations for Jenkins Court:

Year	Number of Expiring Leases	Total Rentable Square Feet Under Expiring Leases	2003 Contractual Rent Under Expiring Leases		Percentage of 2003 Contractual Rent Under Expiring Leases
2003	1	3,640	$	17,745	0.7	%
2004	6	44,853		892,387	35.6
2005	2	15,970		373,443	14.9
2006	2	12,606		273,741	10.9
2007	4	13,395		237,085	9.4
2008	1	3,000		69,000	2.7
2010	1	4,050		92,935	3.7
2011	1	22,498		553,451	22.1

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Bank Branches

Historically, our bank branches have typically been acquired through formulated price contracts, with each acquisition generally consisting of a portfolio of five to 35 bank branches, although we have in the past and may again in the future acquire smaller or larger portfolios. These transactions involve both the acquisition of fee interests in properties as well as the assumption of leasehold interests. Where we assume leasehold interests, we seek to sublease the bank branches to third party tenants. Of the 130 bank branches that are currently in our portfolio as of February 14, 2003, 106 of the properties are leased or subleased and 24 of the properties are vacant. Of the vacant properties five are currently under contract for sale. The average remaining lease term for the leased locations is approximately 10 years.

Our leases generally provide us with internal growth derived from scheduled rent increases. Our goal is to lease properties pursuant to long-term, triple net or bond net leases that include contractual rent increases. Periodic contractual rent increases provide reliable increases in future rent payments, while rent increases based on the Consumer Price Index provide protection against inflation.

We believe that long-term leases provide a predictable income stream over the term of the lease, making fluctuations in market rental rates and in real estate values less significant to achieving our overall investment objectives. Long-term leases also make it easier for us to obtain longer-term fixed-rate mortgage financing with principal amortization, thereby moderating the interest rate risk associated with financing or refinancing our property portfolio by reducing the outstanding principal balance over time. In addition, we believe that long-term leases minimize management time and transaction costs. Although we regard long-term leases as a central element of our acquisition strategy, we may acquire properties that are subject to short-term leases where we believe that the properties represent a compelling opportunity.

In connection with our evaluation of potential properties and transactions, we undertake a credit analysis to determine the creditworthiness of a tenant and review the ability of the tenant to meet its operational needs and lease obligations. Typically our tenants are community banks or large regional banks. The table below sets forth our top 10 bank branch tenants based on 2003 contractual rent as of February 14, 2003 and assumes completion of all of our transactions in process:

Tenant	Number of Branches	2003 Contractual Rent		Percentage of 2003 Contractual Rent
Bank of America	98	$	7,600,000	39.3	%
Wachovia Bank	75		5,484,926	28.4
Sovereign Bank	11		1,177,788	6.1
Sun National Bank	13		931,038	4.8
Unity Bank	7		628,154	3.3
BB&T	7		324,000	1.7
Liberty Bank	2		297,965	1.1
Broad National Bank	2		270,000	1.4
Twin Rivers Community Bank	2		237,367	1.2
Fleet Bank	2		188,420	1.0

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Set forth below is general information relating to each of our bank branches owned as of December 31, 2002:

Owned Bank Branches

Location	Tenant	Rentable Square Feet	2003 Contractual Rent		Lease Expiration
Leased Properties
Runnemede, NJ	All Over Town Partnership	2,185	$	25,907	5/31/2005
Point Pleasant, NJ	Allaire Community Bank	3,800		84,000	9/30/2010
Moorestown, NJ	Aspen Falls, LLC	250		1,662	3/31/2003
	Bob Myer Realty, Inc.	4,700		53,346	7/31/2005
Linden, NJ	Broad National Bank	8,590		160,000	2/28/2014
Collingswood, NJ	CNB Partnership, LLC	3,750		45,000	12/31/2009
Moosic, PA	Fidelity Deposit & Discount Bank	1,860		40,920	3/31/2009
Hamilton Square, NJ	First Constitution Bank	4,930		109,382	6/30/2014
Bensalem, PA	Fleet Bank	6,150		73,394	1/31/2011
Warminster, PA	Fleet Bank	4,700		115,025	4/30/2009
San Angelo, TX	Grape Creek Independent School District	6,700		33,001	9/30/2006
Campbelltown, PA	Lebanon Valley Farmers Bank	2,720		37,082	2/28/2014
Linden, NJ	Liberty Bank	5,605		168,659	2/28/2019
Abington, PA	Mellon Bank	5,304		90,000	6/30/2008
New Bern, NC	New Safeway Taxi Service	2,150		24,000	12/31/2003
Phillipsburg, NJ	Phillipsburg National Bank and Trust	5,600		62,156	12/31/2009
Boyertown, PA	Security National Bank	2,300		44,765	4/14/2010
Pottstown, PA	Security National Bank	4,026		36,125	2/28/2019
Little Rock, AR	Sobel, Inc.	2,341		15,400	10/31/2005
Phoenixville, PA	Sovereign Bank	5,040		156,577	2/28/2019
Emmaus, PA	Sovereign Bank	4,800		108,707	2/28/2019
Kennett Square, PA	Sovereign Bank	6,186		193,432	2/28/2019
Feasterville, PA	Suburban Community	5,500		150,964	12/31/2008
Cherry Hill, NJ	Sun National Bank	2,930		74,904	4/30/2009
Clementon, NJ	Sun National Bank	2,100		54,228	8/31/2009
Freehold, NJ	Sun National Bank	3,326		69,087	4/30/2009
Hightstown, NJ	Sun National Bank	4,500		88,062	1/31/2009
Kendall Park, NJ	Sun National Bank	3,000		78,375	8/31/2009
Lawrenceville, NJ	Sun National Bank	4,790		122,336	1/31/2009
Manasquan, NJ	Sun National Bank	4,000		96,049	1/31/2009
Pennington, NJ	Sun National Bank	6,758		70,000	12/31/2001
Somerdale, NJ	Sun National Bank	2,200		55,879	1/31/2009
Ventnor, NJ	Sun National Bank	1,872		58,135	4/30/2009
Spring Lake Heights, NJ	The Ocean Federal Savings Bank	2,200		55,122	10/31/2009
Linden, NJ	Unity Bank	6,158		67,202	2/28/2009
Berkeley Heights, NJ	Unity Bank	3,288		82,162	12/31/2009
Edison, NJ	Unity Bank	4,500		100,804	2/28/2009
Highland Park, NJ	Unity Bank	3,200		72,270	5/31/2008
South Plainfield, NJ	Unity Bank	3,400		87,363	3/31/2009
Springfield, NJ	Unity Bank	5,180		137,708	1/31/2009
Scotch Plains, NJ(1)	Valley National Bank	4,156		88,000	2/28/2019
North Plainfield, NJ	Wachovia Bank	1,500		24,761	12/31/2003
Dresher, PA	Wachovia Bank	3,900		101,500	6/30/2020
Philadelphia, PA	Willow Grove Bank	3,100		89,000	12/31/2009
Wachovia Portfolio(2)
Dalton, GA	Wachovia Bank	3,821			12/9/2004
Archdale Office, NC	Wachovia Bank	3,258			12/9/2004
Charlotte, NC	Wachovia Bank	3,469			12/9/2004
Cary, NC	Wachovia Bank	3,608			12/9/2004
Wilson, NC	Wachovia Bank	4,858			12/9/2004
Rocky Mount, NC	Wachovia Bank	3,252			12/9/2004
Hickory, NC	Wachovia Bank	14,663			12/9/2004
Hickory, NC	Wachovia Bank	3,010			12/9/2004
Lexington, NC	Wachovia Bank	9,837			12/9/2004
Cornelius, NC	Wachovia Bank	5,116			12/9/2004
Albemarle, NC	Wachovia Bank	9,696			12/9/2004
Huntersville, NC	Wachovia Bank	3,643			12/9/2004
Southern Pines, NC	Wachovia Bank	3,265			12/9/2004
Statesville, NC	Wachovia Bank	9,567			12/9/2004
Raleigh, NC	Wachovia Bank	3,974			12/9/2004
Charlotte, NC	Wachovia Bank	3,119			12/9/2004
Clover, SC	Wachovia Bank	2,557			12/9/2004
Hilton Head, SC	Wachovia Bank	8,413			12/9/2004
Hilton Head, SC	Wachovia Bank	12,350			12/9/2004
Florence, SC	Wachovia Bank	13,356			12/9/2004
Greenwood, SC	Wachovia Bank	11,692			12/9/2004
Greenwood, SC	Wachovia Bank	2,095			12/9/2004
Rock Hill, SC	Wachovia Bank	3,894			12/9/2004
Harrisonburg, VA	Wachovia Bank	3,190			12/9/2004
Richmond, VA	Wachovia Bank	7,976			12/9/2004
Portsmouth, VA	Wachovia Bank	3,550			12/9/2004

(1) Property is subject to an agreement for lease to another tenant.

(2) These properties are leased to Wachovia Bank, N.A. under a two year lease that expires on December 9, 2004. Wachovia Bank has the right to terminate or vacate the properties without penalty upon 60 days’ prior written notice.

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Location	Rentable Square Feet
Vacant Properties
Decatur, AL	3,044
Little Rock, AR	2,074
Fort Myers, FL(1)	4,700
Harbor Oaks, FL(1)	1,000
Warner Robbins, GA(1)	6,362
Derby, KS	17,434
Aurora, MO	9,660
Johnstown, NY	9,900
Kingston, NY(1)	12,000
Shallotte, NC	5,462
Newberry, SC(1)	2,937
Boones Creek, TN	1,400
Columbia, TN	3,608
Columbia, TN	2,000
Mineral Wells, TN	3,500
Morrison, TN	2,600
Vanleer, TN	2,948
White Bluff, TN	2,540

                                             (1)    Property is subject to an agreement for sale.

Leased Bank Branches

Location	Tenant	Rentable Square Feet	2003 Contractual Rent		Lease Expiration
Subleased Properties
Fort Washington, PA	Abington Bank	3,000	$	77,660	12/31/2013
Tulsa, OK	Banc First	7,310		162,286	1/31/2007
Tulsa, OK	Bank of Commerce	6,527		54,996	10/30/2005
Montgomeryville, PA	Beneficial Savings Bank	2,738		89,532	12/31/2009
West Orange, NJ	Broad National Bank	2,772		110,000	12/31/2004
Ardmore, PA	Sovereign Bank	2,960		121,200	12/31/2009
Lakehurst, NJ	Commerce Bank	4,760		63,069	4/30/2003
West Goshen, PA	Downingtown National Bank	3,000		83,798	8/21/2022
Greenville, SC	First Citizens Bank & Trust Co. of SC	3,600		93,403	6/30/2008
Chattanooga, TN	Half Price Optical	2,880		43,500	12/31/2014
Cranbury, NJ	Liberty Bank	2,732		129,305	8/30/2014
N. Fort Myers, FL	Point Bank	3,085		127,042	9/30/2008
Bayville, NJ	Pulaski Savings Bank	3,000		67,489	7/31/2011
Milltown, NJ	Pulaski Savings Bank	3,500		80,522	8/31/2011
Little Rock, AR	Simmons First	1,750		37,173	10/31/2003
Mendham, NJ	Somerset National	3,000		97,390	12/31/2010
Allentown, PA	Sovereign Bank	10,173		231,337	1/31/2019
Allentown, PA	Sovereign Bank	2,450		55,701	5/15/2003
Devon, PA	Sovereign Bank	2,990		92,889	2/28/2018
Exton, PA	Sovereign Bank	2,500		77,667	3/31/2004
Reading, PA	Sovereign Bank	1,676		32,607	2/28/2004
Thorndale, PA	Sovereign Bank	2,500		77,667	4/30/2005
Wind Gap, PA	Sovereign Bank	1,273		30,000	2/28/2019
Howell, NJ	Sun National Bank	1,456		36,982	12/30/2011
Jackson, NJ	Sun National Bank	2,070		53,321	1/30/2009
Whiting, NJ	Sun National Bank	2,940		74,675	12/30/2011
Bethlehem, PA	Twin Rivers Community Bank	2,355		118,683	12/23/2007
Westgate, PA	Twin Rivers Community Bank	2,355		118,683	3/31/2016
Port Monmouth, NJ	Two Rivers Community Bank	2,180		36,644	8/31/2007
East Brunswick, NJ	Unity Bank	3,000		80,643	4/29/2014

Location	Rentable Square Feet
Vacant Properties
Pine Bluff, AR	1,974
Lakeland, FL	7,934
Juno Beach, FL	2,646
Orlando, FL	2,537
Kingston, TN	1,200
Euclid, VA	4,150

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Recent Developments and Completed Transactions

Financing Transactions

Since we completed our private placement in September 2002, we have engaged in the following financing transactions:

• On January 21, 2003, we obtained a $200.0 million bridge loan from Bank of America, N.A. in connection with acquiring a portfolio of 14 office buildings from a wholly owned subsidiary of Dana Commercial Credit Corporation for a total purchase price of approximately $339.3 million. The borrower is a special purpose entity formed for the purpose of obtaining the loan, which is guaranteed by our operating partnership. The bridge loan has a 60 day term, and bears interest at an annual rate of LIBOR plus 1.25%. We intend to replace the loan with long-term permanent financing prior to its maturity date.

• On December 17, 2002, we received a commitment from Bank of America, N.A. for a $75.0 million credit facility that we will use to finance selected property acquisitions and for working capital purposes. We anticipate that this credit facility will have a term of three years and will bear annual interest at LIBOR plus         %, and will be secured by interests in selected properties. Availability under this credit facility will be determined based on the net present value of the monthly base rent payments on the properties securing the loans. In addition, under the terms of this credit facility, only properties satisfying various specified parameters may be used to secure our obligations under the credit facility, including minimum credit ratings for the tenants in these properties.

Property Acquisitions

Dana Commercial Credit Corporation Sale Leaseback Portfolio.    On January 9, 2003, we acquired a portfolio of 14 office buildings containing approximately 3.8 million rentable square feet from a wholly owned subsidiary of Dana Commercial Credit Corporation for an aggregate purchase price of approximately $339.3 million. See “Properties—Office Buildings.”

Bank of America Small Office Portfolio.    On August 7, 2002, we entered into an agreement to acquire 18 office buildings in 10 states from Bank of America, N.A. for a purchase price of approximately $34.1 million. This specifically tailored transaction is designed to provide Bank of America with the flexibility to increase or decrease its occupancy in these facilities over time as well as to remove these assets from their balance sheet. In total, the 18 buildings contain approximately 554,000 rentable square feet. Each of these office buildings contains a single bank branch with additional office space. The transaction requires Bank of America to lease, on average, 35.0% of the rentable square footage of each property for a 10 year term on a triple net lease basis with annual rent payments of approximately $3.1 million.

On December 16, 2002, we acquired 16 of these 18 office buildings, containing approximately 510,000 rentable square feet, for an aggregate purchase price of approximately $31.8 million. We anticipate closing on the remaining two buildings under this agreement by the end of March 2003. We anticipate that approximately 195,000 rentable square feet of the portfolio will be leased back to Bank of America, N.A., approximately 84.0% of which constitutes bank branches. In addition, as of February 14, 2003, an aggregate of approximately 138,000 rentable square feet was leased to third parties under leases with Bank of America, which we have assumed, and the remaining 221,000 rentable square feet was vacant.

Wachovia Bank Formulated Price Contract.    On September 12, 2002, we entered into a formulated price contract with Wachovia Bank, N.A. for the purchase of surplus bank branches in the bank’s entire retail banking territory, which covers East Coast states from Connecticut to Florida. On December 6, 2002, we acquired 26 bank branches under this contract containing approximately 157,000 rentable square feet for an aggregate purchase price of approximately $24.4 million. On February 5, 2003, we acquired five additional vacant bank branches containing approximately 16,000 rentable square feet for an aggregate purchase price of approximately $2.8 million. All of these branches are leased by Wachovia Bank under short-term leases that are terminable on 60 days’ notice by Wachovia Bank without penalty.

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Bank of America Formulated Price Contract.    On November 22, 2000, we entered into a formulated price contract with Bank of America, N.A., for the purchase of surplus bank branches in Bank of America’s retail territory in 21 states and the District of Columbia. Prior to our private placement in September 2002, we acquired 73 bank branches pursuant to this contract containing approximately 400,000 rentable square feet. Since our private placement, we have acquired five additional branches containing approximately 65,000 rentable square feet for an aggregate purchase price of approximately $3.1 million.

AmSouth Formulated Price Contract.    On June 28, 2002, we entered into an agreement with AmSouth Bank to acquire 14 vacant bank branches located in Florida, Mississippi and Tennessee containing approximately 38,000 rentable square feet. On December 20, 2002, we acquired 11 of these properties for an aggregate purchase price of approximately $2.6 million. Of these 11 properties, 10 were acquired directly and one was acquired through the acquisition of leasehold interests. On February 13, 2003, we acquired one of the remaining properties for approximately $260,000. As of February 14, 2003, we have sold one property and have entered into an agreement to sell another property. We have rejected the remaining two properties as a result of our due diligence review of the properties.

KeyBank Formulated Price Contract.    On April 11, 2002, we entered into a formulated price contract with KeyBank, N.A. for the purchase of surplus bank branches in KeyBank’s retail territory in Indiana, Maine, Michigan, New Hampshire, New York, Ohio and Vermont. Since our private placement in September 2002, we have acquired two bank branches containing approximately 22,000 rentable square feet for an aggregate purchase price of approximately $426,000. An additional two properties were sold by KeyBank directly to a third party. We received an assignment fee of approximately $100,000 in connection with this sale. We are currently marketing the two properties we purchased for lease to third parties.

Transactions in Process

As of February 14, 2003, we are a party to agreements relating to the potential purchase of additional properties consisting of approximately 202 bank branches and 145 office buildings. All of our transactions in process are subject to satisfactory completion of due diligence. We cannot assure you that we will be able to complete any of the acquisitions that we have under contract or that the terms we have negotiated will not change. Set forth below is summary information regarding these properties:

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Transactions in Process as of February 14, 2003

Seller	Property Type	Acquisition Structure	Anticipated Closing	Number of Buildings		Rentable Square Feet		Projected Purchase Price (1)
								(in thousands)
Wachovia Bank	Bank branches	Formulated Price	March 2003	18		102,000		$	12,700
Bank of America	Bank branches	Formulated Price	March 2003	6		96,200			3,200
Pitney Bowes—Wachovia Bank	Bank branches	Sale Leaseback	March 2003	73		346,320			62,243
	Small office	Sale Leaseback	March 2003	12		457,712			47,109
	Large office	Sale Leaseback	March 2003	2		250,668			34,098
Pitney Bowes—Bank of America	Bank branches	Sale Leaseback	March 2003	98		461,216			84,037
Finova Capital—BB&T	Bank branches	Sale Leaseback	March 2003	7		48,911			4,210
	Small office	Sale Leaseback	March 2003	1		32,400			2,790
	Large office	Sale Leaseback	March 2003	2		169,497			14,600
Bank of America	Small office	Specifically Tailored	March 2003	2		44,000			2,200
Bank of America	Small office	Specifically Tailored	May 2003(2)	97	(3)	2,758,620	(3)		251,563	(3)
	Large office	Specifically Tailored	May 2003(2)	27	(3)	5,454,661	(3)		497,137	(3)
Wachovia Bank	Small office	Formulated Price(4)	July 2003	1		30,000			3,080
First States Wilmington, L.P.	Large office	Specifically Tailored	—  (5)	1		263,000			50,000
Total				347		10,515,205		$	1,068,968

(1) Includes all estimated acquisition costs.

(2) This transaction will close in stages beginning in May 2003 and is required to close no later than October 2003.

(3) Under our agreement with Bank of America, N.A. for the purchase of 124 office buildings, Bank of America has the right, during our due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and the further right, subject to our approval and to other terms and conditions, to add properties to the portfolio or to substitute properties for those currently in the portfolio. The aggregate purchase price for the portfolio will be adjusted to account for any additions, reductions or substitutions.

(4) Small office buildings may in limited circumstances be purchased under our formulated price contract with Wachovia Bank, N.A.

(5) We have an option to purchase this property at any time prior to May 24, 2007.

Set forth below is additional information regarding the properties listed above.

Bank of America Specifically Tailored Transaction.    On February 14, 2003, we entered into an agreement with Bank of America to acquire a portfolio of 124 office buildings containing approximately 8.2 million rentable square feet. The aggregate purchase price for the properties is approximately $749.0 million. The parties are currently negotiating a lease agreement for the portfolio and anticipate executing a lease agreement by March 10, 2003. We will have a due diligence period of 75 days, beginning upon execution of the lease agreement, to examine the properties. The due diligence period will be extended for any property as to which we identify due diligence issues during the initial 75 day due diligence period. Prior to closing, Bank of America has the right, during our due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and the further ability, subject to our approval and to other terms and conditions, to add properties to the portfolio or to substitute for any property covered by the agreement another property owned by Bank of America, provided that the new property is of substantially the same value and character as the property being removed from the portfolio. The aggregate purchase price for the properties will be adjusted to account for any addition, reduction or substitution.

Upon consummating the transaction, Bank of America, N.A. will lease all or a portion of each of the acquired properties from us with a lease term of 20 to 29½ years at a rate based on a formula contained in the purchase agreement. Subject to the terms and conditions of the lease agreement, Bank of America will be entitled

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to increase its occupancy of any of the properties, to reduce periodically its occupancy of the acquired properties based on a to be agreed upon schedule, and to vacate space in any property for space at another location within this portfolio. Bank of America will also have certain rights of first refusal and first offer on the acquired properties. Subject to satisfactory completion of our due diligence, we anticipate closing this acquisition in stages beginning in the second quarter of 2003, and are required to close on all of the properties in the portfolio no later than October 2003. Upon completion of the transaction, Bank of America will initially lease an aggregate of approximately 65% of the rentable square feet. Approximately 12.0% of the rentable square feet is leased to third parties.

Upon consummating the transaction, we would be restricted from selling any property in the portfolio without Bank of America’s consent while Bank of America remains a tenant in that building.

Pitney Bowes—Wachovia Bank Sale Leaseback Portfolio.    On August 9, 2002, we entered into an agreement with Pitney Bowes to acquire a portfolio of properties acquired in 1988 by Pitney Bowes through a sale leaseback arrangement with Wachovia Bank, N.A. There are 73 bank branches and 14 office buildings leased by Wachovia Bank, containing an aggregate of approximately 1.1 million rentable square feet. We anticipate that the total acquisition cost of the portfolio, including payment of the remaindermen interests and repayment of the outstanding debt, will be approximately $143.0 million. In the short term, we intend to finance the acquisitions with a combination of equity and indebtedness drawn from a line of credit for which we have received a commitment from Bank of America, N.A. We have negotiated with Wachovia Bank to extend the term of the leases for 23 properties through 2023, and we intend to finance these properties on a long-term basis with credit tenant lease financing. In addition, Wachovia Bank will continue to lease 51 of the bank branches under currently existing leases through 2008, at which time we may lease the properties either to Wachovia Bank or to other third party tenants. The remaining 13 properties are subleased to other financial institutions through 2008, at which time we may lease to the current tenant or other third party tenants. Subject to satisfactory completion of our due diligence, we anticipate closing this acquisition by March 2003. Based on the leases currently in place on the properties in this portfolio, the 2003 contractual rent for these properties is approximately $15.6 million.

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Set forth below is summary information regarding the properties in this portfolio:

Location	Rentable Square Feet
Boca Raton, FL	4,756
Callahan, FL	9,409
Davie, FL	7,016
Daytona Beach, FL	8,960
Eustis, FL	16,289
Ft. Lauderdale, FL	14,120
Green Cove Spring, FL	10,350
Hollywood, FL	8,555
Jacksonville, FL	113,152
Jacksonville, FL	31,825
Jacksonville, FL	13,750
Jacksonville, FL	12,850
Jacksonville, FL	6,925
Jacksonville, FL	3,600
Lakeland, FL	3,052
Lantana, FL	6,234
Largo, FL	9,878
Largo, FL	2,245
New Port Richey, FL	3,230
North Port, FL	10,406
Orlando, FL	6,495
Palatka, FL	24,280
Rockledge, FL	4,407
St. Petersburg, FL	3,234
Tampa, FL	42,025
Atlanta, GA	4,000
Atlanta, GA	15,016
Augusta, GA	7,800
Augusta, GA	7,512
Breman, GA	5,641
East Point, GA	9,899
Hapeville, GA	11,843
Mableton, GA	29,115
Macon, GA	18,925
Marietta, GA	5,380
Marietta, GA	2,670
Martinez, GA	9,550
Newnan, GA	30,036
Norcross, GA	13,335
Norcross, GA	7,751
Norcross, GA	4,000
Rome, GA	42,949
Rome, GA	2,529
Roswell, GA	4,960

Location	Rentable Square Feet
Savannah, GA	4,200
Savannah, GA	2,699
Vidalia, GA	10,000
Waynesboro, GA	7,856
Advance, NC	2,084
Asheville, NC	58,503
Blowing Rock, NC	2,016
Brevard, NC	7,576
Burlington, NC	10,965
Canton, NC	3,039
Cary, NC	2,065
Charlotte, NC	3,391
Charlotte, NC	3,277
China Grove, NC	4,365
Clemmons, NC	3,986
Conover, NC	4,378
Fayetteville, NC	23,173
Forest City, NC	8,212
Gastonia, NC	2,869
Goldsboro, NC	4,185
Graham, NC	8,180
Greensboro, NC	5,969
Harrisburg, NC	3,264
Hickory, NC	4,653
Jefferson, NC	4,380
Kannapolis, NC	3,435
King, NC	4,290
Knightdale, NC	1,526
Lexington, NC	17,094
Marion, NC	6,170
Morganton, NC	21,370
N. Wilkesboro, NC	137,516
Newton, NC	8,140
Rockingham, NC	3,290
Rocky Mount, NC	7,275
Rocky Mount, NC	2,135
Roxboro, NC	9,402
Sparta, NC	4,181
Valdese, NC	7,936
W. Jefferson, NC	3,933
Waynesville, NC	4,585
Wilkesboro, NC	3,782
Yadkinville, NC	3,429

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Finova Capital—BB&T Sale Leaseback Portfolio.    On January 24, 2003, we entered into an agreement with Finova Capital Corporation to acquire three office buildings and seven bank branches located in North Carolina consisting of approximately 251,000 rentable square feet. Under the agreement, the total purchase price for these properties will be approximately $21.6 million including cash and the assumption of approximately $3.1 million in debt bearing interest at an annual rate of 6.5%. Each of these properties is leased to BB&T Corporation through a master lease, which contains the same terms for each of the properties, and was 100% occupied as of February 14, 2003. The initial term of the master lease expires on December 31, 2005, and the lease may be renewed at the option of the tenant for up to six additional terms of five years each. The 2003 contractual rent under the lease is approximately $2.1 million. With respect to one of the properties in this portfolio, we are acquiring the improvements and a ground lease interest. Upon expiration of the ground lease in 2005, we will have the right to purchase the ground lease estate for $475,000. Subject to satisfactory completion of our due diligence, we anticipate acquiring these additional properties during March 2003.

Set forth below is information regarding the properties in this portfolio:

Location	Rentable Square Feet
Bank Branches
Apex, NC	2,394
Charlotte, NC	2,400
Graham, NC	11,200
Havelock, NC	2,880
Morehead City, NC	6,600
New Bern, NC	13,514
Plymouth, NC	9,923
Office Buildings
Wilson, NC	96,723
Wilson, NC	72,774
Wilson, NC	32,400
Total	250,808

Pitney Bowes—Bank of America Sale Leaseback Portfolio.    On January 30, 2003, we entered into an agreement with Pitney Bowes to acquire a portfolio of properties acquired in 1998 by Pitney Bowes through a sale leaseback transaction with Bank of America, N.A. There are 98 bank branches in this portfolio leased by Bank of America through 2008, containing an aggregate approximately of 461,000 rentable square feet. The properties are leased under a master lease pursuant to which 2003 contractual rent totals approximately $9.6 million.

We anticipate that the total acquisition cost of the portfolio, including payment of the remaindermen interests and assumption of the outstanding debt, will be approximately $84.0 million. In the short term, we intend to finance the acquisitions with a combination of equity and indebtedness drawn from a line of credit for which we have received a commitment from Bank of America, N.A. We have negotiated with Bank of America to extend the term of the leases for 64 of the bank branches through 2023, and we intend to permanently finance these properties on a long-term basis with credit tenant lease financing. Of the remaining 34 properties:

• 17 of the bank branches will be leased upon acquisition to Bank of America for four years. After these leases expire, we may lease either to Bank of America or to other third party tenants;

• 13 properties are subleased to third parties; and

• the remaining four properties are vacant.

We intend to lease the vacant bank branches or sell them to third parties. Subject to satisfactory completion of our due diligence, we anticipate closing these acquisitions by the end of March 2003.

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Set forth below is information regarding the properties in this portfolio:

Location	Rentable Square Feet
Asheville, NC	37,707
Asheville, NC	2,566
Asheville, NC	1,594
Black Mountain, NC	2,158
Boone, NC	5,688
Brevard, NC	2,819
Burgaw, NC	3,860
Burlington, NC	11,824
Burlington, NC	2,859
Calabash, NC	2,048
Candler, NC	2,325
Carolina Beach, NC	5,542
Cary, NC	2,800
Chapel Hill, NC	2,100
Charlotte, NC	6,147
Charlotte, NC	3,381
Charlotte, NC	3,298
Charlotte, NC	3,200
Charlotte, NC	2,980
Charlotte, NC	2,700
Charlotte, NC	2,400
Charlotte, NC	2,350
Charlotte, NC	2,048
Cherryville, NC	2,800
Columbus, NC	2,000
Cornelius, NC	3,200
Dallas, NC	2,562
Denver, NC	2,500
Dunn, NC	10,900
Durham, NC	2,495
Durham, NC	2,048
Eden, NC	6,500
Eden, NC	4,032
Eden, NC	1,200
Elizabethtown, NC	3,840
Farmville, NC	7,582
Fayetteville, NC	2,400
Fayetteville, NC	2,048
Fayetteville, NC	2,033
Garner, NC	5,457
Gastonia, NC	16,046
Gastonia, NC	4,823
Gastonia, NC	2,562
Greensboro, NC	3,380
Greensboro, NC	2,942
Greenville, NC	24,352
Greenville, NC	3,800
Greenville, NC	2,750
Greenville, NC	2,048
Havelock, NC	5,445

Location	Rentable Square Feet
Henderson, NC	10,643
Henderson, NC	4,186
Henderson, NC	2,500
High Point, NC	3,062
High Point, NC	2,854
Hillsborough, NC	5,070
Kenansville, NC	2,925
Kinston, NC	7,878
Kinston, NC	2,145
Lincolnton, NC	22,016
Lincolnton, NC	2,400
Marion, NC	6,200
Monroe, NC	3,375
Mooresville, NC	5,800
Mt. Airy, NC	1,920
Mt. Olive, NC	3,654
New Bern, NC	2,599
North Wilkesboro, NC	2,300
Pinehurst, NC	4,200
Pleasant Garden, NC	2,626
Raleigh, NC	5,574
Raleigh, NC	3,890
Raleigh, NC	2,677
Raleigh, NC	2,649
Reidsville, NC	5,915
Richlands, NC	2,965
Salisbury, NC	5,681
Salisbury, NC	1,800
Southern Pines, NC	3,400
Spring Lake, NC	3,364
Spruce Pine, NC	13,248
Stanley, NC	2,240
Statesville, NC	24,113
Statesville, NC	3,010
Swansboro, NC	2,148
Tarboro, NC	5,216
Tarboro, NC	1,500
Thomasville, NC	7,116
Troutman, NC	2,200
Tryon, NC	8,900
Washington, NC	12,130
Washington, NC	1,916
Washington, NC	1,408
Wilmington, NC	3,600
Wilmington, NC	3,200
Wilmington, NC	1,200
Winston-Salem, NC	3,630
Winston-Salem, NC	2,736

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Bank of America Small Office Portfolio.    Subject to satisfactory completion of our due diligence, we anticipate closing on the purchase of the two buildings remaining under this contract by March 2003 for an aggregate purchase price of approximately $2.2 million.

Wachovia Bank Formulated Price Contract.    Wachovia Bank, N.A. has given us notice of 18 additional properties, which, subject to satisfactory completion of due diligence, we anticipate acquiring by the end of March 2003 for an aggregate purchase price of approximately $12.7 million. We anticipate the acquisition of up to an additional 150 to 200 bank branches pursuant to this contract for an aggregate purchase price that will be dependent upon the exact number of properties we actually purchase from Wachovia Bank. In addition, Wachovia Bank has notified us that it intends to sell a small office building containing approximately 30,000 rentable square feet for an aggregate purchase price of approximately $3.1 million, which we anticipate acquiring by July 2003.

Bank of America Formulated Price Contract.    Bank of America, N.A. has given us notice of six additional properties, which, subject to satisfactory completion of due diligence, we anticipate acquiring by the end of the March 2003 for an aggregate purchase price of approximately $3.2 million.

Option Agreement

Three Beaver Valley Road is a five-story office building containing approximately 263,000 rentable square feet located in Wilmington, Delaware. First States Wilmington, L.P., or FSW, a partnership controlled by Nicholas S. Schorsch, acquired the property from Wachovia Bank, N.A. in May 2002 for a purchase price of approximately $42.7 million. The office building is fully occupied by two tenants under triple net leases. The tenants are American International Insurance Company (a wholly owned subsidiary of American International Group) and Wachovia Bank. In addition to the office building, construction on a parking garage has been approved and is currently pending. Upon the completion of the parking garage, American International Insurance Company will become the sole tenant of Three Beaver Valley Road.

While we do not own and are not obligated to buy this property, we have the option to do so at any time. In connection with a loan that our operating partnership made to FSW in connection with FSW’s purchase of Three Beaver Valley Road, which loan has since been repaid, FSW granted us an option, exercisable at any time prior to May 24, 2007. The option allows us to purchase all limited and general partnership interests of FSW for a purchase price of approximately $50.0 million, including approximately $42.8 million in assumed debt and $7.2 million in cash, which includes an amount estimated to equal a 13% annual return on the capital invested by the FSW partners in FSW. Because this property is controlled by Nicholas S. Schorsch, the decision as to whether or not we acquire this property will be made by a majority of our independent, non-affiliated trustees.

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. Such laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under such laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs. These costs may be substantial, and can exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow using such property as collateral, and may adversely impact our investment on that property.

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Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building containing asbestos-containing materials and potentially asbestos-containing materials in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potentially asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potentially asbestos-containing materials.

Prior to closing any property acquisition, we obtain environmental assessments in a manner we believe prudent in order to attempt to identify potential environmental concerns at such properties. These assessments are carried out in accordance with an appropriate level of due diligence and generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the first phase of the environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures.

We believe that our portfolio is in compliance in all material respects with all federal and state regulations regarding hazardous or toxic substances and other environmental matters.

Competition

While we believe that our strategy and market focus represent a novel approach, we nevertheless compete in acquiring properties with financial institutions, institutional pension funds, other REITs, other public and private real estate companies and private real estate investors, any of which may have greater resources or other competitive advantages. In addition, other entities may determine to pursue the same or a similar strategy and may have greater resources or other competitive advantages. We also face competition in leasing or subleasing available properties to prospective tenants. The actual competition for tenants varies depending on the characteristics of each local market.

Insurance

We carry comprehensive liability, casualty, flood and rental loss insurance covering all of the properties in our portfolio. We believe that the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We have also obtained terrorism insurance on some of our larger office buildings, which is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants and biological and chemical weapons. We intend to obtain similar terrorism insurance on office buildings that we acquire in the future to the extent required by our lenders. In addition, in certain areas, we pay additional premiums to obtain flood or earthquake insurance. We do not carry insurance for generally uninsured losses such as loss from riots.

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Employees

We employed 43 full-time employees as of February 14, 2003. We believe that our relations with our employees are good.

Legal Proceedings

We are not involved in any litigation other than routine litigation arising in the ordinary course of business that we expect to be covered by insurance.

Other Types of Investments and Policies

Debt Limitation Policy.    We have no restriction in our declaration of trust or bylaws regarding the amount of indebtedness we may incur. However, we have adopted a policy pursuant to which we plan to maintain the amount of indebtedness that we incur at an amount between 55% and 65% of our total assets. The policy excludes from the leverage calculation our investment in and indebtedness incurred in connection with our residential mortgage-backed securities portfolio and related hedging strategies. Our board may amend or waive this debt limitation policy at any time without shareholder approval and without notice to shareholders.

Investments in Mortgages and Residential Mortgage-Backed Securities.     Since we commenced operations in September 2002, we implemented a short-term cash management strategy pursuant to which we have invested a substantial portion of our excess cash directly in whole-pool fixed- and adjustable-rate residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We intend to continue this strategy by investing on a short-term basis a substantial portion of the proceeds from this offering in residential mortgage-backed securities, pending completion of the acquisitions we have under contract and completion of other future acquisitions.

Whole-pool residential mortgage-backed securities represent the entire ownership interest in pools of mortgage loans made by lenders such as savings and loan institutions, mortgage bankers and commercial banks. Various government and government-related agencies assemble the pools of loans for sale to investors.

At December 31, 2002, we owned residential mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac that had a market value of approximately $1,116.1 million, and had borrowed approximately $1,053.5 million through reverse repurchase agreements to finance our investments in those securities. We also have an unleveraged investment of $144.3 million in shares of an institutional mutual fund which invests primarily in residential mortgage-backed securities. Mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Mortgage-backed securities, on the other hand, provide for a monthly payment that consists of both interest and principal. In effect, these payments are a “pass through” of the monthly interest and principal payments made by borrowers on the mortgage loans that back the securities, net of any fees paid to the issuer or guarantor of the securities.

The investment characteristics of pass-through mortgage-backed securities differ from those of traditional fixed-income securities. The major differences include the payment of interest and principal on the mortgage-backed securities, as described above, and the possibility that principal may be prepaid at any time due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed-income securities.

Mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the underlying property, and other social and demographic conditions. Generally, prepayments on pass-through mortgage-backed securities increase during periods of falling mortgage

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interest rates and decrease during periods of rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our investments.

We have in the past leveraged, and intend to continue to leverage, our investment in residential mortgage-backed securities by entering into reverse repurchase agreements. Under these agreements, we sell assets to a third party with the commitment to repurchase the same assets at a fixed price on an agreed upon date. The repurchase price reflects the purchase price plus an agreed upon market rate of interest. We account for the reverse repurchase agreements as loans, secured by the underlying assets, that we owe to the third party.

We use the proceeds from these reverse repurchase agreement borrowings to invest in additional residential mortgage-backed securities, while continually monitoring our use of leverage. Based on book values, our debt-to-equity ratio as of December 31, 2002, on our total portfolio of residential mortgage-backed securities, excluding our investment in the institutional mutual fund, was approximately 17 to 1. This ratio would be five to 1 if our investment in the institutional mutual fund were included as equity. Traditionally, lenders have permitted repurchase agreement borrowings against residential mortgage-backed securities such as ours at a debt-to-equity ratio of up to 19 to 1. Our declaration of trust and bylaws do not impose any specific limits on permissible leverage and we may increase our leverage ratio in the future. These agreements expire, and are then renewed, on a regular basis. As of December 31, 2002, the reverse repurchase agreements we held had stated maturity dates of no more than 90 days from the date of the agreement.

Hedging and Interest Rate Management.    We acquire derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. We do not intend to acquire derivative instruments for speculative purposes. Our hedging activities may include entering into interest rate swaps and caps and options to purchase swaps and caps. Under the tax laws applicable to REITs, we generally will be able to enter into swap or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments to hedge indebtedness that we incur to finance our acquisitions of real estate or real estate-related assets such as mortgage-backed securities.

We engage in several interest rate management techniques that are intended to match the effective maturity of, and the interest received on, our residential mortgage-backed securities with the effective maturity of, and the interest owed on, the indebtedness we incur to finance those investments. We generally will be able to use those techniques directly, instead of through a corporate subsidiary that is fully subject to corporate income taxation. We may make significant assumptions and estimates relating to future interest rates and market value of our residential mortgage-backed securities in implementing our investment and leverage strategies. Our interest rate management techniques may include:

• puts and calls on securities or indices of securities;

• Eurodollar futures contracts and options on these types of contracts;

• interest rate swaps, which are the exchange of fixed-rate payments for floating rate payments; or

• other similar transactions.

We may also use these techniques to attempt to protect ourselves against declines in the market value of our properties that result from general trends in debt markets. The inability to match closely the maturities and interest rates of our residential mortgage-backed securities with the maturities and interest rates of our indebtedness incurred to finance our investments in those mortgage-backed securities, or the inability to protect adequately against declines in the market value of our residential mortgage-backed securities, could result in losses with respect to our residential mortgage-backed securities investments.

The interest rates we pay under short-term reverse repurchase agreement borrowings increase and decrease as short-term interest rates increase or decrease. The interest rates we earn on residential mortgage-backed securities remain constant for fixed rate securities. If short-term interest rates increase significantly above

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4.40%, which is the average nominal yield of our residential mortgage-backed securities portfolio as of December 31, 2002, the interest owed on our short-term reverse repurchase agreement borrowings would exceed the interest income payable to us on our residential mortgage-backed securities.

Interest rate management techniques do not eliminate risk. For example, if both long-term and short-term interest rates were to increase significantly, it could be expected that:

• the weighted-average life of the mortgage-backed securities would be extended because prepayments of the underlying mortgage loans would decrease; and

• the market value of the fixed-rate mortgage-backed securities would decline as long-term interest rates increase.

Investments in Other Securities or Entities.    We have no current intention of acquiring loans secured by properties. We do not expect to engage in any significant investment activities with other entities, although we may consider joint venture investments with other investors or with financial institutions. We may also invest in the securities of other issuers in connection with acquisitions of indirect interests in properties, typically general or limited partnership or limited liability company interests in special purpose entities owning properties. We may in the future acquire some, all or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and the REIT qualification requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify as a REIT. However, we do not anticipate investing in other issuers of securities for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, we do not intend that our investments in securities will require us to register as an “investment company” under the Investment Company Act, and we intend to divest securities before any registration would be required. We do not intend to engage in trading, underwriting, agency distribution or sales of securities of other issuers.

Lending Policies.    We do not have a policy limiting our ability to make loans to other persons. We may consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We may make loans to joint ventures in which we may participate in the future. However, we do not intend to engage in significant lending activities.

Equity Capital Policies.    Our board of trustees has the authority, without further shareholder approval, to issue additional authorized common shares and preferred shares or otherwise raise capital, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Existing shareholders will have no preemptive right to additional shares issued in any offering, and any offering may cause a dilution of investment. We may in the future issue common shares or units of our operating partnership in connection with acquisitions.

Our board of trustees may authorize the issuance of preferred shares with terms and conditions that could have the effect of delaying, deterring or preventing a transaction or a change in control that might involve a premium price for holders of our common shares or otherwise might be in their best interest. Additionally, preferred shares could have dividend, voting, liquidation and other rights and preferences that are senior to those of our common shares.

We may, under certain circumstances, upon approval by our board of trustees but without obtaining shareholder approval, repurchase common shares from our shareholders. Our board of trustees has no present

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intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT.

In the future we may institute a dividend reinvestment plan, or DRIP, which would allow our shareholders to acquire additional common shares by automatically reinvesting their cash dividends. Common shares would be acquired pursuant to the DRIP at a price equal to the then prevailing market price or a slight discount thereto, without payment of brokerage commissions or service charges. Shareholders who do not participate in the plan will continue to receive cash dividends as declared.

Conflict of Interest Policy.    We have adopted a code of business conduct and ethics that contains a policy that prohibits conflicts of interest between our officers, employees and trustees on the one hand, and our company on the other hand, except where a majority of our disinterested trustees waives the conflict. Waivers of our conflicts of interest policy will be disclosed to our shareholders in accordance with SEC requirements. We cannot assure you that our conflicts of interest policy will eliminate all conflicts of interest.

Our conflicts of interest policy states that a conflict of interest exists when a person’s private interest is not aligned or appears to be not aligned, or interferes or appears to interfere, in any way with our company’s interest. The policy prohibits us, absent the approval of a majority of our disinterested trustees, from entering into agreements, transactions or business relationships, or otherwise taking actions, that involve conflicts of interest. For example, under our conflicts of interest policy we are prohibited from, among other things:

• acquiring any assets or other property from, or selling any assets or other property to, any of our trustees, officers or employees, any of their immediate family members or any entity in which any of our trustees, officers or employees or any of their immediate family members has an interest of more than 5%;

• making any loan to, or borrowing from, any of our trustees, officers or employees, any of their immediate family members or any entity in which any of our trustees, officers or employees or any of their immediate family members has an interest of more than 5%;

• engaging in any other transaction with any of our trustees, officers or employees, any of their immediate family members or any entity in which any of our trustees, officers or employees or their immediate family members has an interest of more than 5%; or

• permitting any of our trustees or officers to make recommendations regarding or to approve compensation decisions that will personally benefit such trustees or officers or their immediate family members whom we employ, other than customary compensation for service on our board and its committees.

Our declaration of trust provides that in defining or interpreting the powers and duties of the trustees, reference may be made by the trustees to the Maryland General Corporate Law, or MGCL. The MGCL provides that a contract or other transaction between a corporation and any of that corporation’s directors and any other entity in which that director is also a director or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the fact that the director was present at the meeting at which the contract or transaction is approved or the fact that the director’s vote was counted in favor of the contract or transaction, if:

• the fact of the common directorship or interest is disclosed to the board or a committee of the board, and the board or that committee authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even if the disinterested directors constitute less than a quorum;

• the fact of the common directorship or interest is disclosed to shareholders entitled to vote on the contract or transaction, and the contract or transaction is approved by a majority of the votes cast by the shareholders entitled to vote on the matter, other than votes of shares owned of record or beneficially by the interested director, corporation, firm or other entity; or

• the contract or transaction is fair and reasonable to the corporation.

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MANAGEMENT

Trustees and Executive Officers

Our board of trustees currently consists of seven members. Prior to completion of this offering, we anticipate increasing the size of our board of trustees by two trustees and filling those two vacancies with independent trustees nominated by our nominating and corporate governance committee and approved by our board. The trustees are divided into three classes and serve staggered terms of three years. Each Class I trustee holds office for a term expiring at the 2003 annual meeting of shareholders, each Class II trustee holds office for a term expiring at the 2004 annual meeting of shareholders and each Class III trustee holds office for a term expiring at the 2005 annual meeting of shareholders. We have provided below information regarding our executive officers and current trustees.

Name	Age	Position
Nicholas S. Schorsch	41	Chief Executive Officer, President and Vice Chairman of the Board of Trustees (Class III)
Glenn Blumenthal	44	Senior Vice President—Asset Management, Chief Operating Officer and Trustee (Class I)
William P. Ciorletti	46	Senior Vice President—Finance and Chief Financial Officer
Jeffrey C. Kahn	41	Senior Vice President—Acquisitions and Dispositions
Edward J. Matey Jr.	48	Senior Vice President and General Counsel
Sonya A. Huffman	29	Senior Vice President—Operations
Shelley D. Schorsch	40	Senior Vice President—Corporate Affairs
Lewis S. Ranieri	56	Chairman of the Board of Trustees, Trustee (Class II)
Henry Faulkner, III	53	Trustee (Class II)
Raymond Garea	53	Trustee (Class I)
Richard A. Kraemer	58	Trustee (Class II)
J. Rock Tonkel, Jr.	40	Trustee (Class III)

Each of our executive officers, other than Mr. Matey, has served as an officer since we commenced operations on September 10, 2002, and prior to that time was employed by American Financial Resource Group, Inc., or AFRG, which was founded in 1995 for the purpose of acquiring operating companies and other assets in a variety of industries including financial services and real estate. Each of our executive officers, other than Mr. Matey, also was an officer of, although not employed by, our REIT from its formation on May 23, 2002 until it commenced operations on September 10, 2002.

Nicholas S. Schorsch has served as our Chief Executive Officer, President and Vice Chairman of our board of trustees, since our formation as a REIT. From 1995 to September 2002, Mr. Schorsch was President and Chief Executive Officer of AFRG, which he founded in 1995. From 1980 to 1994, Mr. Schorsch was Chairman of the Board and President of Thermal Reduction Company, a non-ferrous metal products manufacturing business that Mr. Schorsch sold in 1994. Mr. Schorsch is Assistant Clerk (Assistant Chairman) of the board of trustees of Abington Friends School. Mr. Schorsch also serves as Chairman of the Board of the Performing Arts Center of Abington. Mr. Schorsch is the spouse of Shelley D. Schorsch, our Senior Vice President—Corporate Affairs.

Glenn Blumenthal has served as our Senior Vice President—Asset Management and Chief Operating Officer and a member of our board of trustees since our formation as a REIT. From April 1999 to September 2002, Mr. Blumenthal was a Senior Vice President of AFRG. Mr. Blumenthal has over 20 years experience specializing in the acquisition and disposition of large real estate portfolios. His background also includes property management, leasing, site selection and land development. From 1992 to April 1999, Mr. Blumenthal was a Vice President at First Union responsible for acquisition and asset management of major offices, capital and expense budgeting and reporting. In this position, he was an integral part of our acquisition of the CoreStates properties. From 1988 to 1992, Mr. Blumenthal was with the Resolution Trust Corporation where he managed a $120 million real estate portfolio.

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William P. Ciorletti has served as our Senior Vice President—Finance and Chief Financial Officer since our formation as a REIT. From April 1998 to September 2002, Mr. Ciorletti was Chief Financial Officer of AFRG and president of AFRG’s operating companies. Mr. Ciorletti has over 22 years of experience in financial and operational management and has been active in the merger and acquisition activity of all AFRG affiliates. From August 1982 to January 1992, Mr. Ciorletti served as President and CEO of Central Atlantic Distributors, Inc., an engineering and commercial building equipment distributor, and also served on the boards of several industry organizations, until he sold the company in 1992. From January 1992 to 1995, he worked for the company that acquired Central Atlantic Distributors, and from 1995 to April 1998, he was involved with restructurings and acquisitions for various companies. Mr. Ciorletti began his career with Touche Ross & Co., an international accounting and consulting firm. Mr. Ciorletti is a Certified Public Accountant.

Jeffrey C. Kahn has served as our Senior Vice President—Acquisitions and Dispositions since our formation as a REIT. He manages our local, regional and national sales and leasing activities, participates in our acquisition activities, and also directs the execution of our disposition strategy. In 1999, Mr. Kahn formed Strategic Alliance, the exclusive real estate brokerage operations of AFRG. He has been personally involved in 100 buy-side and 225 sell-side bank branch transactions for us. Mr. Kahn served for over 20 years as Vice President of Kahn & Co., specializing in real estate brokerage, investment management and consulting, managing a portfolio containing gasoline service stations, retail sites, multi-tenant office buildings and large corporate offices. He has been active in the commercial real estate market in the Pennsylvania, New Jersey and Delaware area for over 20 years. Mr. Kahn has developed large commercial retail centers, performed feasibility analysis on distressed properties, acquired local, state and federal permit approvals, and performed institutional land purchases and appraisal review. Mr. Kahn is currently a licensed real estate broker in Pennsylvania and New Jersey. He is a member of the National Association of Realtors, Pennsylvania Association of Realtors and International Council of Shopping Centers and has served on the Board of the Southern Home Services for Children and the Abington YMCA.

Edward J. Matey Jr. has served as our Senior Vice President and General Counsel since October 2002. From October 1991 to September 2002, Mr. Matey was a partner in the law firm of Morgan, Lewis & Bockius LLP where his practice focused on real estate law, including property acquisition and disposition, commercial leasing, construction contracting and complex financings. From 1986 to September 1991, Mr. Matey was an associate at Morgan, Lewis & Bockius LLP, and from 1982 to 1986, Mr. Matey was an associate at Clark, Ladner, Fortenbaugh & Young. Active in professional organizations, Mr. Matey is a member of the Real Property, Probate and Trust Law Section of the American Bar Association and a member of the Real Property Section of the Philadelphia Bar Association. For his last three years at Morgan Lewis, Mr. Matey led the team of attorneys that represented AFRG and its related entities in the acquisition, disposition, leasing and financing of real estate properties. Mr. Matey is licensed to practice law in Pennsylvania and New Jersey.

Sonya A. Huffman has served as our Senior Vice President—Operations since our formation as a REIT, and previously had been with AFRG in the same position since January 2001. Ms. Huffman is responsible for due diligence and settlement of all acquisitions and dispositions of our real estate. From October 1998 to January 2001, Ms. Huffman worked for the law firm of Morgan, Lewis & Bockius LLP where she primarily worked on the team that represented AFRG and its investment partnerships in their real estate acquisitions and dispositions. From January 1996 to October 1998, Ms. Huffman worked for Rite Aid Corporation on the acquisition and disposition of retail real estate assets.

Shelley D. Schorsch has served as our Senior Vice President—Corporate Affairs since October 2002, and as Director of Building Design and Coordination since our formation as a REIT. Prior to that, Ms. Schorsch was a co-founder of AFRG and served as its chief creative officer since 1995. Ms. Schorsch has been responsible for corporate communications, brand strategy, interior design, space utilization, and project management for us and AFRG. Prior to her affiliation with AFRG, Ms. Schorsch held various senior management positions in corporate communications, business development and brand strategy for Thermal Reduction Company and L.D. Davis Company. Ms. Schorsch is the spouse of Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees.

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Lewis S. Ranieri has served as a member of our board of trustees and served as non-executive Chairman of our board of trustees since our formation as a REIT. Mr. Ranieri is Chairman, Chief Executive Officer and President of Ranieri & Co., Inc., a private investment advisor and management corporation, which he founded in 1988. Mr. Ranieri has served as the Chairman since June 2002, and prior to that as Vice Chairman from November 1988, of Hyperion Capital Management, Inc., a registered investment advisor, which he founded in 1988. He is the founder and prime originator of Hyperion Partners L.P. and Hyperion Partners II L.P. He also served as Chairman of Bank United Corp. and as a director of Bank United, from its inception in 1988 until its merger with Washington Mutual in February 2001.

Mr. Ranieri is a former Vice Chairman of Salomon Brothers Inc., where he was employed from July 1968 to December 1987, and was one of the principal developers of the secondary mortgage market. While at Salomon Brothers, Mr. Ranieri helped to develop the capital markets as a source of funds for housing and commercial real estate and to establish Salomon Brothers’ then leading position in the mortgage-backed securities area.

Mr. Ranieri has served on the National Association of Home Builders Mortgage Roundtable since 1986. In recognition of his dedication and lifelong achievements in the housing industry, Mr. Ranieri was inducted into the National Housing Hall of Fame. He is also a recent recipient of the lifetime achievement award given by the Fixed Income Analysts Society, Inc. and subsequently inducted into their Hall of Fame for outstanding practitioners in the advancement of the analysis of fixed-income securities and portfolios.

Mr. Ranieri serves on the boards of directors of each of Reckson Associates Realty Corp. and Delphi Financial Group, Inc. In addition, in 2002 Mr. Ranieri was appointed and currently serves as the lead independent director of Computer Associates International, Inc. in connection with their adoption of new corporate governance principles. He is also Chairman of two registered investment funds, The Hyperion Total Return Fund, Inc. and The Hyperion Strategic Mortgage Income Fund, Inc., and a director of one registered investment fund, The Hyperion 2005 Investment Grade Opportunity Term Trust, Inc. Mr. Ranieri also acts as a trustee or director of various environmental, religious and cultural institutions such as Environmental Defense, Shrine of Elizabeth Ann Seton/Our Lady of the Rosary Church, The Metropolitan Opera and the American Ballet Theatre (Chairman).

Henry Faulkner, III has served as a member of our board of trustees since our formation as a REIT. Mr. Faulkner is Chief Executive Officer of Faulkner Cadillac, Inc., Faulkner Pontiac/Buick/GMC Truck, Inc., Faulkner Honda, Inc., Faulkner Nissan, Inc., Saturn of Jenkintown, Inc. and several other automobile dealerships, positions which he has held for over 20 years. Mr. Faulkner is the Chairman of the board of trustees of Abington Memorial Hospital and Abington Friends School and has served as a director or trustee of many other charitable institutions.

Raymond Garea has served as a member of our board of trustees since our formation as a REIT. Mr. Garea is currently Chief Executive Officer of Axia Capital Management, LLC, which he founded in November 1991. From 1991 until October 2001, Mr. Garea was a senior member of the Portfolio Management team at Franklin Mutual Advisors (and its predecessor firm, Heine Securities), the investment advisor for the Mutual Series Fund Group. He was the Portfolio Manager for Mutual Financial Services since its inception in August 1997 and for Mutual Qualified from October 1998 until February 2002. From 1987 to 1991, Mr. Garea was Vice President and Senior Analyst in the High Yield Research Group at Donaldson, Lufkin & Jenrette. Mr. Garea started his career as a financial analyst at Cates Consulting in 1981. At the time of his departure in 1987, he was president of Cates Consulting. From 1973 to 1981, Mr. Garea was Director of Education and Research at the Conference of State Bank Supervisors, a national association for state bank regulators.

Richard A. Kraemer has served as a member of our board of trustees since our formation as a REIT. Mr. Kraemer is Vice Chairman of the board of directors and Chairman of the audit committee of Saxon Capital, Inc., a mortgage loan origination company, and a director and Chairman of the audit committee of The Community’s Bank, positions which he has held since 2001. From 1996 to 1999, he was Vice Chairman of Republic New York Corporation, a publicly traded bank holding company. From 1993 to 1996, he was Chairman and Chief Executive Officer of Brooklyn Bancorp, the publicly traded holding company for Crossland Federal Savings Bank.

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J. Rock Tonkel, Jr. has served as a member of our board of trustees since our formation as a REIT. Since March 2001, Mr. Tonkel has been Executive Vice President and Head of Investment Banking at Friedman Billings Ramsey. In addition to overseeing Friedman Billing Ramsey’s focused investment banking activity in Real Estate, Energy, Technology, Healthcare and Diversified Industries, he is Senior Managing Director of Friedman Billing Ramsey’s Financial Institutions Group, a position to which he was named in November 2000. Prior to joining Friedman Billings Ramsey in 1994, Mr. Tonkel served as Special Assistant to the Director of the Office of Thrift Supervision, or OTS, the federal regulatory agency for the savings and loan industry. At the OTS, Mr. Tonkel oversaw the restructuring of many of the nation’s largest troubled thrifts and savings banks, including Glendale Federal Bank, California Federal Bank, and Dime Savings Bank of New York. Prior to OTS, Mr. Tonkel was an associate with Prudential Securities and an associate with Keefe, Bruyette & Woods, Inc. in New York City.

Promoters.    Messrs. Schorsch, Ranieri, Blumenthal, Ciorletti, Kahn and Matey, Mmes. Huffman and Schorsch and Friedman, Billings, Ramsey & Co., Inc., acted as promoters of our company, which means that they took initiative in founding and organizing our business. J. Rock Tonkel, Jr., one of our trustees, serves as Executive Vice President and Head of Investment Banking of Friedman, Billings, Ramsey & Co., Inc.

Corporate Governance—Board of Trustees and Committees

Our business is managed through the oversight and direction of our board of trustees. Upon completion of this offering, our board of trustees will consist of nine members, with no more than three insider trustees. At least two-thirds of our trustees will be “independent,” with independence being defined in the manner established by our board of trustees and in a manner consistent with listing standards established by the New York Stock Exchange, and will be nominated by our nominating and corporate governance committee. Nicholas S. Schorsch will have the right, so long as he is our chief executive officer, to nominate our then current or former executive officers to fill the remaining one-third of the positions on our board. These nominations must be submitted to and approved by our corporate governance and nominating committee, and satisfy the standards established by that committee for membership on our board.

Upon completion of this offering, our board will have two insiders, one non-management trustee who is not “independent,” and six “independent” trustees. The trustees are regularly kept informed about our business at meetings of the board and its committees and through supplemental reports and communications. Our non-management trustees expect to meet regularly in executive sessions without the presence of any corporate officers. Our board seeks to maintain high corporate governance standards.

Our corporate governance structure was initially established in September 2002 in connection with our formation as a REIT. We have enhanced our corporate governance structure in several respects in light of recent regulatory developments intended to improve corporate governance practices. We expect to make our corporate governance documents available on our website after the offering. These documents include our declaration of trust, bylaws, board of trustees guidelines on corporate governance, committee charters and code of business conduct and ethics.

The board has established three committees whose principal functions are briefly described below.

Audit Committee

Our board of trustees has established an audit committee, which is composed of three independent trustees, Messrs. Kraemer (Chairman), Faulkner and Garea. It assists the board in overseeing (i) our accounting and financial reporting processes; (ii) the integrity and audits of our financial statements; (iii) our compliance with legal and regulatory requirements; (iv) the qualifications and independence of our independent auditors; and (v) the performance of our internal and independent auditors. The audit committee also:

• has sole authority to appoint or replace our independent auditors;

• has sole authority to approve in advance all audit and non-audit engagement fees, scope and terms with our independent auditors;

• monitors compliance of our employees with our standards of business conduct and conflict of interest policies; and

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• meets at least quarterly with our senior executive officers, internal audit staff and our independent auditors in separate executive sessions.

The specific functions and responsibilities of the audit committee are set forth in the audit committee charter. Our board of trustees has determined that at least one member of our audit committee will qualify as an audit committee financial expert as defined under current SEC regulations and the other members of our audit committee will satisfy the financial literacy requirements for audit committee members under current SEC regulations.

Compensation and Human Resources Committee

Our board of trustees has established a compensation and human resources committee, which will be composed of three independent trustees after the offering, Messrs. Faulkner (Chairman), Kraemer and Ranieri. Mr. Schorsch is currently a member of the committee, but will not be on the committee after the completion of the offering. The principal functions of the committee are to:

• evaluate the performance of our senior executives;

• review and approve senior executive compensation plans, policies and programs;

• consider the design and competitiveness of our compensation plans;

• administer and review changes to our incentive, share option and restricted share and long-term incentive plans under the terms of the plans; and

• produce an annual report on executive compensation for inclusion in our proxy statement.

The committee also reviews and approves corporate goals and objectives relevant to chief executive officer compensation, evaluates the chief executive officer’s performance in light of those goals and objectives, and recommends to the board the chief executive officer’s compensation levels based on its evaluation. The committee has the authority to retain and terminate any compensation consultant to be used to assist in the evaluation of chief executive officer or senior executive compensation.

The compensation and human resources committee will administer our 2002 Equity Incentive Plan, Key Employee Incentive Compensation Plan and Supplemental Executive Retirement Plan.

Nominating and Corporate Governance Committee

Our board of trustees has established a nominating and corporate governance committee, which is composed of four independent trustees, Messrs. Garea (Chairman), Faulkner, Kraemer and Ranieri. The nominating and corporate governance committee is responsible for seeking, considering and recommending to the board qualified candidates for election as trustees and recommending a slate of nominees for election as trustees at the annual meeting. It also periodically prepares and submits to the board for adoption the committee’s selection criteria for trustee nominees. It reviews and makes recommendations on matters involving general operation of the board and our corporate governance, and it annually recommends to the board nominees for each committee of the board. In addition, the committee annually facilitates the assessment of the board of trustee’s performance as a whole and of the individual trustees and reports thereon to the board. The committee has the sole authority to retain and terminate any search firm to be used to identify trustee candidates. Shareholders wishing to recommend trustee candidates for consideration by the committee can do so by writing to the Secretary of the Trust at our corporate headquarters in Jenkintown, Pennsylvania, giving the candidate’s name, biographical data and qualifications. The Secretary will, in turn, deliver any shareholder recommendations for trustee candidates prepared in accordance with our bylaws to the nominating and corporate governance committee. Any such

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recommendation must be accompanied by a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as a trustee.

Interlocks and Insider Participation

Upon completion of this offering, there will be no compensation committee interlocks, none of our employees will participate on the compensation and human resources committee and the committee will consist of three independent trustees. Prior to this offering, our compensation and human resources committee included Mr. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees. For more information on the relationships between us and each of Mr. Schorsch and Mr. Faulkner, please see “Certain Relationships and Related Transactions,” beginning on page 114.

Compensation of Trustees

Each trustee who is not an employee will be paid a trustee’s fee of $20,000 per year other than the Chairperson who will receive a $25,000 annual fee. Non-employee trustees will also receive a fee of $2,000 for each board of trustees meeting attended and, if conducted on a different date than a board meeting, each committee meeting attended. In addition, we will pay non-employee trustees a fee of $3,000 per year for service as Chairman of a board committee and the Chairman of each board committee will be paid a fee of $3,000 per committee meeting attended regardless of whether the committee meeting is on the same day as a board meeting. Mr. Tonkel has waived his right to receive these fees. Trustees who are employees will receive no additional compensation for their service as a trustee. In addition, we will reimburse all trustees for reasonable out-of-pocket expenses incurred in connection with their services on the board of trustees.

During the fiscal year ended December 31, 2002, we issued to Mr. Ranieri 150,000 restricted common shares and options to purchase 150,000 common shares. The grants of options and restricted common shares to Mr. Ranieri vest over a period of three years in equal annual installments and the exercise price for the options is $10.00 per share. In the event Mr. Ranieri is removed from service or resigns as a trustee prior to September 10, 2005, we have a right to repurchase all unvested restricted common shares for nominal consideration; provided, if we fail to nominate Mr. Ranieri for re-election to the board of trustees or our shareholders do not re-elect Mr. Ranieri and, in either case, Mr. Ranieri is willing to continue to serve as a trustee, all unvested options owned at that time by Mr. Ranieri will accelerate and become vested and we will have no further repurchase rights with respect to any restricted common shares owned by Mr. Ranieri at that time. During the fiscal year ended December 31, 2002, we issued to each of Messrs. Faulkner, Garea and Kraemer 20,000 restricted common shares. These restricted common shares vest over a three year period in equal annual installments. If they are removed from service or resign as trustees prior to September 10, 2005, we have a right to repurchase all unvested restricted common shares for nominal consideration and all unvested options will terminate in accordance with their terms; provided, if we fail to nominate a trustee for re-election to the board of trustees or our shareholders do not re-elect that trustee and, in either case, that trustee is willing to continue to serve as a trustee, all unvested options owned at that time will accelerate and become vested and we will have no further repurchase rights with respect to any restricted common shares owned by that trustee at such time.

The board of trustees may determine to make grants of restricted common shares or options to purchase common shares from time to time to non-employee trustees.

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Executive Compensation

The following table sets forth the salary and other compensation paid to our President and Chief Executive Officer and each of our other four highest paid employees for the fiscal year ended December 31, 2002. We were organized in May 2002, did not conduct any prior operations and, accordingly, did not pay any compensation to our executive officers for the years ended December 31, 2001 and 2000. We have assigned the rights and obligations under the employment agreements that we maintain with our executive officers to our operating partnership, which will also employ the executive officers and will pay their compensation.

Summary Compensation Table

		Annual Compensation								Long-Term Compensation	All Other Compensation
Name and Principal Position	Year	Salary		Bonus(1)			Other Annual Compensation			Securities Underlying Options
Nicholas S. Schorsch	2002	129,583	(2)	$	240,950	(3)	$	6,000	(4)	1,515,625	$	—
President and Chief Executive Officer
Glenn Blumenthal	2002	40,042	(2)	$	152,784	(5)(6)	$	2,250	(4)	468,750	$	—
Senior Vice President—Asset Management and Chief Operating Officer
Edward J. Matey Jr.	2002	90,000	(7)	$	49,726	(6)(8)	$	1,500	(4)	37,500	$	—
Senior Vice President and General Counsel
William P. Ciorletti	2002	39,792	(2)	$	151,778	(6)(9)	$	2,250	(4)	150,000	$	—
Senior Vice President—Finance and Chief Financial Officer
Sonya A. Huffman	2002	31,667	(2)	$	138,021	(6)(10)	$	2,250	(4)	125,000	$	—
Senior Vice President—Operations

(1) Beginning in 2003, the executive officers will be eligible to participate in the Key Employee Incentive Compensation Plan.

(2) Reflects base salary for the period from September 10, 2002 through December 31, 2002.

(3) Mr. Schorsch’s employment agreement guarantees him a minimum bonus of $375,000 per year and allows him to earn an additional bonus as determined by our compensation and human resources committee. For the 2002 fiscal year, Mr. Schorsch received bonuses of $109,375, the prorated portion of his guaranteed minimum bonus, and $131,575, awarded based on 2002 operating results.

(4) This amount reflects monthly car allowance payments under the executive officer’s employment agreement.

(5) Mr. Blumenthal’s employment agreement guarantees him a minimum bonus of $90,000 per year and allows him to earn up to two times his base salary as a bonus. For the 2002 fiscal year, Mr. Blumenthal received bonuses of $26,250, the prorated portion of his guaranteed minimum bonus, and $51,534, awarded based on 2002 operating results.

(6) Includes a special bonus of $75,000 determined by the chief executive officer in recognition of the executive’s work toward completion of our September 2002 private placement.

(7) Reflects base salary for the period from October 1, 2002 through December 31, 2002.

(8) Mr. Matey’s employment agreement allows him to earn up to one-half his base salary as a bonus. For the 2002 fiscal year, Mr. Matey received a bonus of $49,726, awarded based on 2002 operating results.

(9) Mr. Ciorletti’s employment agreement guarantees him a minimum bonus of $75,000 per year and allows him to earn up to two times his base salary as a bonus. For the 2002 fiscal year, Mr. Ciorletti received bonuses of $20,600, the prorated portion of his guaranteed minimum bonus, and $56,178, awarded based on 2002 operating results.

(10) Ms. Huffman’s employment agreement guarantees her a minimum bonus of $50,000 per year and allows her to earn up to two times her base salary as a bonus. For the 2002 fiscal year, Ms. Huffman received bonuses of $14,583, the prorated portion of her guaranteed minimum bonus, and $48,438, awarded based on 2002 operating results.

Internal Revenue Code Section 162(m) disallows a tax deduction to public companies for compensation paid in excess of $1,000,000 for any fiscal year to the company’s chief executive officer and the four other most

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highly compensated executive officers. To qualify for deductibility under Internal Revenue Code Section 162(m), compensation in excess of the $1,000,000 annual maximum paid to these executive officers must be “performance-based” compensation, as determined under Internal Revenue Code Section 162(m). For these purposes, compensation generally includes base salary, annual bonuses, stock option exercises, compensation attributable to restricted shares vesting and nonqualified benefits. While it is our intention to structure compensation so that it satisfies the “performance-based” compensation requirements under Internal Revenue Code Section 162(m) to the fullest extent possible, if we become subject to the provisions of Internal Revenue Code Section 162(m), the compensation and human resources committee will balance the costs and burdens involved in doing so against the value to us and our shareholders of the tax benefits to be obtained by us. Accordingly, we reserve the right, should Internal Revenue Code Section 162(m) apply, to design compensation programs that recognize a full range of performance criteria important to our success, even where the compensation paid under such programs may not be deductible as a result of the application of Internal Revenue Code Section 162(m).

Employment Agreements

We or our operating partnership have entered into employment agreements with each of the executive officers named in the summary compensation table above and with our other executive officers. We have assigned the employment agreements that we entered into to our operating partnership and our operating partnership has assumed those employment agreements. The employment agreements provide that these executive officers are eligible to participate in the 2002 Equity Incentive Plan, as described in the section below entitled “2002 Equity Incentive Plan.” For a list of restricted shares awarded under the 2002 Equity Incentive Plan to each of these executive officers during the fiscal year 2002, see the summary compensation table presented above. For a list of stock options granted under the 2002 Equity Incentive Plan to each of these executive officers during the fiscal year 2002, see the section entitled “Option Grants” below. Other restricted share awards and option grants that have been approved by our compensation and human resources committee and will be issued immediately following completion of this offering are shown below in the section entitled “Management—2002 Equity Incentive Plan.” The employment agreements also provide that these executive officers are eligible to receive annual bonuses under our approved bonus plans. See “Management—2003 Annual Bonus Criteria” below.

These employment agreements are for a three year term and provide the following annual base salaries: Nicholas S. Schorsch, $            ; Glenn Blumenthal, $            ; Edward J. Matey Jr., $            ; William P. Ciorletti, $             ; and Sonya A. Huffman, $            . These agreements provide that the executive officers agree to devote substantially all of their business time to our operation (except as we otherwise agree, including on behalf of our operating partnership). In the case of Mr. Schorsch, he is obligated to devote a substantial majority of his business time to our operation, except with respect to properties that he currently owns or controls and that were not acquired in the connection with the acquisition of our initial properties and operating companies in September 2002, and properties that he may reacquire pursuant to a contribution agreement that we entered into in connection with these acquisitions. See “Our Business and Properties—Our Formation.” At the end of the three year term, the employment agreements automatically extend for additional one year periods unless either party terminates the agreement not later than 60 days prior to expiration thereof. In the case of Mr. Schorsch, his employment agreement is for a three year term, which is automatically extended at the end of each year within such term for an additional one year period, unless either party terminates the agreement not later than six months prior to the anniversary of a one year period. The salaries issued under the employment agreements will be adjusted annually based upon the Consumer Price Index. These employment agreements permit us to terminate the executives’ employment with appropriate notice for or without “cause.” “Cause” is generally defined to mean:

• conviction of, or the entry of a plea of guilty or nolo contendere to, a felony (excluding any felony relating to the negligent operation of a motor vehicle or a conviction, plea of guilty or nolo contendere arising under a statutory provision imposing per se criminal liability due to the position held by the executive with us, provided the act or omission of the executive or officer with respect to such matter was not taken or omitted to be taken in contravention of any applicable policy or directive of the board of trustees);

• a willful breach of the executive’s duty of loyalty which is materially detrimental to us;

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• a willful failure to perform or adhere to explicitly stated duties that are consistent with the executive’s employment agreement, or the reasonable and customary guidelines of employment or reasonable and customary corporate governance guidelines or policies, including without limitation the business code of ethics adopted by the board of trustees, or the failure to follow the lawful directives of the board of trustees provided such directives are consistent with the terms of the executive’s employment agreement, which continues for a period of 30 days after written notice to the executive; and

• gross negligence or willful misconduct in the performance of the executive’s duties.

In addition, Mr. Schorsch has the right under his employment agreement to resign for “good reason” in the event of his removal from the board of trustees; any material reduction in duties, responsibilities or reporting requirements, or the assignment of any duties, responsibilities or reporting requirements that are inconsistent with his positions with us; the termination of certain incentive compensation programs; a reduction in his annual base salary; the termination or diminution of certain employee benefit plans, programs or material fringe benefits; relocation of our offices outside of a 50 mile radius of Jenkintown, Pennsylvania; a failure to renew his employment agreement; or our breach of his employment agreement which continues for a period of 30 days after written notice.

Pursuant to his employment agreement, Mr. Schorsch will receive a monthly car allowance of $2,000, will be reimbursed up to $30,000 per year for tax and financial planning services and will receive eight weeks of paid vacation annually and various other customary benefits.

The employment agreements referred to above provide that the executive officers will be eligible to receive the same benefits, including medical insurance coverage and retirement plan benefits in a 401(k) plan to the same extent as other similarly situated employees, and such other benefits as are commensurate with their position. Participation in employee benefit plans will be subject to the terms of said benefit plans as in effect from time to time.

If the executives’ employment ends for any reason, we will pay accrued salary, bonuses and incentive payments already determined, and other existing obligations. In addition, if we terminate the executives’ employment without cause (and in the case of Mr. Schorsch, if he resigns for good reason), we will be obligated to pay (i) a lump sum payment of severance equal to the salary, guaranteed bonus and incentive bonus payable under the agreement for the greater of the remaining term of the employment agreement or 12 months (and in the case of Mr. Schorsch, 36 months), with an offset for salaries earned from other employment for periods after the first 24 months (and in the case of Mr. Schorsch, after the first 18 months), (ii) payment of premiums for group health coverage during the applicable severance period, and (iii) certain other benefits as provided for in said employment agreement (in the case of Mr. Schorsch, full vesting of benefits under our Supplemental Executive Retirement Plan). Additionally, in the event of a termination by us for any reason other than for cause, all of the options and restricted shares granted to the executive will become fully vested.

Upon a change in control, an executive will become fully vested in his options and restricted shares. Mr. Schorsch and any other participants in our Supplemental Executive Retirement Plan, or SERP, will also become 100% vested in their SERP benefit upon a change in control. In general terms, a change of control occurs:

• if a person, entity or affiliated group (with certain exceptions) acquires more than 50% of our then outstanding voting securities;

• if we merge into another entity unless the holders of our voting shares immediately prior to the merger have at least 50% of the combined voting power of the securities in the merged entity or its parent;

• upon the liquidation, dissolution, sale or disposition of all or substantially all of our assets such that after that transaction the holders of our voting shares immediately prior to the transaction own less than 50% of the voting securities of the acquiror or its parent; or

• if a majority of our board votes in favor of a resolution stating that a change in control has occurred.

If payments become due as a result of a change in control and the excise tax imposed by Internal Revenue Code Section 4999 applies, the terms of the employment agreements require us to gross up the executive for the amount of this excise tax plus the amount of income and other taxes due as a result of the gross up payment.

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For a 24 month period (an 18 month period in the case of Mr. Schorsch) after termination of an executive’s employment for any reason other than termination by us without cause, the executives under these employment agreements have agreed not to compete with us by working with or investing in (subject to certain limited exceptions) any enterprise engaged in a business substantially similar to our business during the period of the executive’s employment with us. The executive will not be subject to these restrictions if the executive’s employment is terminated for any reason, except that the executive will be subject to these restrictions if his or her employment is terminated by us for cause or, in the case of Mr. Schorsch, if he resigns without good reason.

2003 Annual Bonus Criteria.    In December 2002, our compensation and human resources committee approved cash incentive bonus criteria for 2003 based on our company’s achievement of specified AFFO targets in 2003. Our executive officers who are entitled to receive cash bonuses under their employment agreements will receive a proportionate amount of the maximum non-guaranteed portion of the incentive bonus that they are eligible to receive under their employment agreements based on our actual AFFO earned in 2003 relative to the targets specified in the approved criteria; provided that Nicholas S. Schorsch will receive an amount of up to two times his annual base salary, subject to his guaranteed minimum incentive bonus and any additional amount that may be awarded by the compensation and human resources committee. Except for Messrs. Matey and Kahn each of our executive officers is eligible to receive up to two times his or her annual base salary. Mr. Matey is eligible to receive up to one-half his annual base salary. Mr. Kahn’s employment agreement provides for payment of incentive bonuses based on criteria adopted by our compensation and human resources committee for our leasing group, which relate to the volume of acquisition, leasing and brokerage transactions that the group completes during the year. Our compensation and human resources committee will reevaluate the annual incentive bonus criteria for our executive officers on an annual basis. In addition, the compensation and human resources committee may change the annual bonus criteria with respect to any executive officer, and may approve any additional bonus awards to any executive officer.

401(k) Plan

We have established and maintained a retirement savings plan under section 401(k) of the Internal Revenue Code to cover our eligible employees. The Code allows eligible employees to defer, within prescribed limits, up to 12% of their compensation on a pre-tax basis through contributions to the 401(k) plan. We match each eligible employee’s annual contributions, within prescribed limits, on a dollar-for-dollar basis on up to 3% of the participant’s compensation. Our matching contributions are subject to a vesting period of four years. Monthly contributions we make with respect to employees after this fourth year of participation in the 401(k) plan vest immediately. All of our full time employees are eligible to participate in the 401(k) plan.

2002 Equity Incentive Plan

We have established our 2002 Equity Incentive Plan, or Incentive Plan, for the purpose of attracting and retaining trustees, executive officers and other key employees, including officers and employees of our operating partnership. The Incentive Plan provides for the issuance of options to purchase common shares and restricted share awards. Each option granted pursuant to the Incentive Plan is designated at the time of grant as either an option intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code, referred to as a qualified incentive option, or as an option that is not intended to so qualify, referred to as a non-qualified option.

Awards.    The Incentive Plan provides for the issuance of options to purchase 3,125,000 common shares and 1,500,000 restricted shares. The Incentive Plan contains an award limit on the maximum number of common shares that may be awarded to an individual in any fiscal year of 1,516,000 common shares underlying options and 600,000 restricted shares. Currently, we have issued options to purchase 2,842,625 common shares and have awarded 1,351,000 restricted common shares.

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Vesting.    Our board of trustees or our compensation and human resources committee determines the vesting of options and restricted share awards granted under the Incentive Plan. In addition, our board of trustees has established a standard schedule for options and restricted shares to vest with respect to 33.33% of the underlying common shares on the one year anniversary of the date of grant for any grant made on the date this offering is completed or thereafter, and 8.33% on the last day of each quarter thereafter until fully vested, unless a different vesting schedule is established by the compensation and human resources committee.

Options.    The Incentive Plan authorizes our compensation and human resources committee to grant qualified incentive options for common shares in an amount and at an exercise price to be determined by it, provided that the price cannot be less than 100% of the fair market value of the common shares on the date on which the option is granted. If a qualified incentive option is granted to a 10% shareholder, additional requirements will apply to the option. The exercise price of non-qualified options will be equal to 100% of the fair market value of common shares on the date the option is granted unless otherwise determined by our compensation and human resources committee. The exercise price for any option is generally payable in cash or, in certain circumstances, by the surrender, at the fair market value on the date on which the option is exercised, of common shares. The Incentive Plan provides that exercise may be delayed or prohibited if it would adversely affect our status as a REIT. In addition, the Incentive Plan permits optionholders to exercise their options prior to the date on which the options will vest. The optionholder will, upon payment for the shares, receive restricted shares having vesting terms on transferability that are identical to the vesting terms under the original option.

The following table shows the number of options that will be held by our executive officers and trustees immediately after this offering.

Name of Grantee	Options Outstanding Under Incentive Plan(1)
Nicholas S. Schorsch	1,515,625
Glenn Blumenthal	468,750
William P. Ciorletti	150,000
Jeffrey C. Kahn	120,000
Edward J. Matey Jr.	37,500
Sonya A. Huffman	125,000
Shelley D. Schorsch	100,000
Lewis S. Ranieri(2)	150,000
All executive officers and trustees as a group	2,666,875

(1) Except for Mr. Ranieri’s options, these options will vest 25% on the first anniversary of the grant date and 6.25% at the end of each quarter thereafter.

(2) Mr. Ranieri’s options are exercisable for a period of 10 years from September 4, 2002, and vest over three years in equal annual installments.

In connection with certain extraordinary events, the compensation and human resources committee may make adjustments in the aggregate number and kind of shares of beneficial interest reserved for issuance, the number and kind of shares of beneficial interest covered by outstanding awards and the exercise prices specified therein as may be determined to be appropriate.

Restricted Shares.    The Incentive Plan also provides for the grant of restricted share awards. A restricted common share award is an award of common shares that is subject to restrictions on transferability and other restrictions, if any, as our compensation and human resources committee may impose at the date of grant. Restricted common shares are subject to vesting as our compensation and human resources committee may approve. The restrictions may lapse separately or in combination at these times, under these circumstances, including without limitation, a specified period of employment or the satisfaction of pre-established criteria, in installments or otherwise, as our compensation and human resources committee may determine. Except to the extent restricted under the award agreement relating to the restricted common shares, a participant granted restricted common shares will have all of the rights of a shareholder, including, without limitation, the right to vote and the right to receive dividends on the restricted common shares.

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Mr. Schorsch’s employment agreement allows him to determine the number of restricted shares to be granted under the Incentive Plan to each of our employees other than members of our senior management team. These grants are subject to an annual limit of 50,000 shares per employee. For each of the first five years that the Incentive Plan is in effect, Mr. Schorsch will be entitled to receive at least 40% of the aggregate amount of restricted shares granted each year. Beginning in year six and for each year thereafter, our compensation and human resources committee may, in its discretion, decrease this figure by no more than 20% of the percentage Mr. Schorsch was entitled to receive in the immediately preceding year or increase it, as it may determine. Mr Schorsch may determine the allocation of the remainder of the total grant of restricted shares to be awarded to other members of our senior management team, other than Shelley D. Schorsch, subject to compensation and human resources committee review and approval.

Upon the termination of employment during the applicable restriction period due to death, permanent disability, or termination by us without cause (and in the case of Mr. Schorsch, if he resigns for good reason), then all unvested restricted common shares will immediately become vested and all restrictions will lapse. If an executive voluntarily terminates his employment with us during the term of his or her employment agreement (and in the case of Mr. Schorsch, if he terminates without good reason), all unvested restricted common shares are forfeited. In addition, if we do not renew any of our executive officer’s employment agreements at the end of its term and the executive ceases to be an employee of ours as a result, then, subject to approval of our compensation and human resources committee, all unvested restricted common shares held by the executive will become fully vested. All unvested and vested restricted common shares are forfeited if an executive is terminated for cause except for Mr. Schorsch, who will forfeit only his unvested restricted common shares. The compensation and human resources committee may in other cases waive, in whole or in part, the forfeiture provisions of restricted common shares.

Upon completion of our September 2002 private placement of common shares, the Incentive Plan was established to provide for 1,500,000 authorized restricted shares, at which time 210,000 restricted shares were issued to independent trustees. The compensation and human resources committee has awarded an additional 1,141,000 restricted shares under the Incentive Plan to executive officers. These awards will become effective under the terms of the Incentive Plan upon the closing of this offering. The following table shows the number of restricted shares that will be held by our executive officers and trustees immediately after this offering.

Name of Grantee	Past Restricted Share Grants Under Incentive Plan(1)	Restricted Share Grants Proposed Under Incentive Plan(1)	Total
Nicholas S. Schorsch	—	600,000	600,000
Glenn Blumenthal	—	218,000	218,000
William P. Ciorletti	—	72,000	72,000
Jeffrey C. Kahn	—	60,000	60,000
Edward J. Matey Jr.	—	72,000	72,000
Sonya A. Huffman	—	72,000	72,000
Shelley D. Schorsch	—	47,000	47,000
Lewis S. Ranieri	150,000	—	150,000
Henry Faulkner, III	20,000	—	20,000
Raymond Garea	20,000	—	20,000
Richard A. Kraemer	20,000	—	20,000
All executive officers and trustees as a group	210,000	1,141,000	1,351,000

(1) These restricted shares vest 33.33% on the first anniversary of the grant and 8.33% at the end of each quarter thereafter.

Administration of the Plan.    The Incentive Plan is administered by our compensation and human resources committee. Mr. Schorsch determines which consultants, executive officers and other employees, other than himself and Ms. Schorsch, will be eligible to participate, subject to compensation and human resources committee review and approval. Awards to non-executive trustees may only be made by our board of trustees.

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The compensation and human resources committee, in its absolute discretion, will determine the effect of an employee’s termination on unvested options and restricted common shares, unless otherwise provided in the Incentive Plan, the participant’s employment or award agreement.

Option Grants

The following table contains information concerning the grant of options under the Incentive Plan made for the fiscal year ended December 31, 2002 to the executive officers named in the summary compensation table. The table also lists potential realizable values of such options on the basis of assumed annual compounded share appreciation rates of 5% and 10% over the life of the options.

	Number of Securities Underlying Options Granted(1)	% of Total Options Granted to Employees in Fiscal Year		Exercise or Base Price Per Share			Potential Realizable Value at Assumed Annual Rates of Share Price Appreciation for Option Term (in thousands)
Name of Grantee						Expiration Date(2)	5%(3)		10%(3)
Nicholas S. Schorsch	1,515,625	55.6	%	$	10.00	September 10, 2012	$	9,532	$	24,155
Glenn Blumenthal	468,750	17.2			10.00	September 10, 2012		2,948		7,471
Edward J. Matey Jr.	37,500	1.4			10.00	September 10, 2012		236		598
William P. Ciorletti	150,000	5.5			10.00	September 10, 2012		943		2,391
Sonya A. Huffman	125,000	4.6			10.00	September 10, 2012		786		1,992

(1) The options granted will vest and become exercisable at a rate of 25% on the first anniversary of the grant date and 6.25% at the end of each quarter thereafter.

(2) The expiration date of the options will be 10 years after the date of the grant.

(3) The potential realizable value is reported net of the option price, but before the income taxes associated with exercise. These amounts represent assumed annual compounded rates of appreciation at 5% and 10% from the date of grant to the expiration date of the options.

Option Exercises

The following table contains information concerning option holdings with respect to each of the executive officers named in the summary compensation table. None of these officers exercised any options during 2002.

	Shares Acquired On Exercise	Value Realized		Number of Securities Underlying Unexercised Options at Fiscal Year-End		Unexercised In-the-Money Options at Fiscal Year-End(1)
Name of Grantee				Exercisable	Unexercisable	Exercisable		Unexercisable
Nicholas S. Schorsch	—	$	—	—	1,515,625	$	—	$	3,334
Glenn Blumenthal	—		—	—	468,750		—		1,031
Edward J. Matey Jr.	—		—	—	37,500		—		83
William P. Ciorletti	—		—	—	150,000		—		330
Sonya A. Huffman	—		—	—	125,000		—		275

(1) For purposes of determining the fair market value of the common shares underlying these options, we used the last closing price on The Portal^SM Market on February 14, 2003.

Key Employee Incentive Compensation Plan

We have established the Key Employee Incentive Compensation Plan, referred to as the KEICP, which is intended to incentivize and reward executives and employees by paying them additional compensation that is based on our performance.

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Supplemental Executive Retirement Plan

We have established a non-qualified supplemental executive retirement plan, referred to as the SERP. Mr. Schorsch is eligible to participate in the SERP as part of his total compensation package, and is the only current participant in the SERP. Other employees may become eligible to participate in the future. The benefit payable under the SERP is based on a specified percentage of each participant’s average annual compensation from us, including base compensation and bonuses paid for the three calendar years out of the last 10 calendar years of employment with us that produces the highest average amount, referred to as the average annual compensation, and subject to an annual maximum benefit. If the participant has not been employed with us for at least three years, the participant’s average actual compensation will be used to determine his or her average annual compensation. Participants may begin to receive SERP payments once they have attained the later of age 60 or retirement. Benefits paid under the SERP are for life with 10 years of guaranteed payments and terminate upon the participant’s death. The participant may elect, within 30 days after the date the participant’s employment with us terminates (or a later date as established by the compensation and human resources committee or other committee of the board of trustees charged with administering the SERP), when the participant wants payment of his or her vested SERP benefit to begin. If the participant elects to receive his or her SERP benefit prior to attaining age 60, the participant’s SERP benefit payment will be actuarially reduced to reflect the longer period over which payments are expected to be made.

Under the terms of Mr. Schorsch’s employment agreement, he is entitled to a SERP benefit equal to 50% of his average annual compensation, subject to reduction in certain circumstances, with a maximum annual benefit of $275,000.

Mr. Schorsch will vest in his SERP benefit over a period of five years, subject to the following vesting schedule:

	Year 1	Year 2	Year 3	Year 4	Year 5
Vested Percentage	22%	43%	63%	82%	100%

Under the SERP, a year of vesting service for Mr. Schorsch is measured by the 12 month period ending on each anniversary of his employment agreement. Mr. Schorsch also will become 100% vested in his SERP benefit if he becomes permanently disabled, he dies, if there is a change in control (as described above), he is terminated by us without cause, or if he terminates for good reason.

The following table shows estimated annual retirement benefits payable to Mr. Schorsch in the SERP on a straight life annuity basis upon retirement in specified years of continuous service and remuneration classes.

Average Annual Compensation	Service (in years)
	Three	Five	10 or More
$   500,000	$	$	$
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
2,250,000
2,500,000

Mr. Schorsch’s current compensation covered by the SERP is $        , which equals Mr. Schorsch’s annual base salary, as set forth in his employment agreement, plus his guaranteed minimum yearly bonus. The initial year covered by the SERP was 2002.

SERP benefits are payable for life with a guaranteed period of 10 years commencing at the later of retirement or age 60 for Mr. Schorsch. If he dies prior to receiving 10 years of guaranteed payments to which he

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is entitled, the actuarial equivalent of the remaining guaranteed payments will be paid to his surviving spouse or designated beneficiary in a single lump sum. If he dies prior to the time benefit payments are scheduled to begin, his surviving spouse or designated beneficiary will receive the actuarial equivalent of his vested SERP benefit, determined on the date of his death, in a single lump sum cash payment.

The SERP is an unfunded plan that is not intended to meet the requirements of Internal Revenue Code Section 401(a). SERP payments may be made from our general assets and a participant is a general, unsecured creditor of us. We will establish a “rabbi” trust in connection with the SERP.

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PRINCIPAL AND SELLING SHAREHOLDERS

Principal Shareholders

The following table sets forth the beneficial ownership of common shares by (i) each of our trustees, (ii) each of our executive officers, (iii) all of our trustees and executive officers as a group and (iv) each of our shareholders known to us to be the beneficial owner of more than five percent of our common shares, as of             , 2003, as adjusted to give effect to the issuance of the restricted common shares issuable upon completion of this offering. The SEC has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that such shareholder has the right to acquire within 60 days after that date through (a) the exercise of any option, warrant or right, (b) the conversion of a security, (c) the power to revoke a trust, discretionary account or similar arrangement, or (d) the automatic termination of a trust, discretionary account or similar arrangement.

Name of Beneficial Owner	Number of Shares Beneficially Owned		Percentage of Class(1)
Nicholas S. Schorsch	3,225,560	(2)(3)	7.2
Glenn Blumenthal	218,000	(3)(4)	*
William P. Ciorletti	72,000	(3)(4)	*
Sonya A. Huffman	72,000	(3)(4)	*
Jeffrey C. Kahn	401,650	(3)(5)	*
Edward J. Matey Jr.	72,000	(3)(4)	*
Shelley D. Schorsch	3,225,560	(3)(6)	7.2
Lewis S. Ranieri	450,000	(3)(7)	1.0
Henry Faulkner, III	459,556	(8)	1.0
Raymond Garea	20,000	(4)	*
Richard A. Kraemer	35,000	(9)	*
J. Rock Tonkel, Jr.	85,000	(10)	*
All executive officers and trustees as a group (12 persons)	5,110,766	(11)	11.2

 * Represents less than 1%.

(1) Assumes              shares of our common shares outstanding as of                 , 2003. In addition, amounts for individuals assume that all units of our operating partnership held by the person are converted for our common shares.

(2) Mr. Schorsch’s shares consist of 1,264,708 common shares, 209,050 common shares held by trusts for the benefit of Mr. Schorsch’s children, 600,000 restricted common shares, units of our operating partnership convertible for 1,104,802 common shares, and 47,000 restricted common shares held by Mr. Schorsch’s spouse, Shelly D. Schorsch, our Senior Vice President—Corporate Affairs. See  Note (6) below.

(3) Does not include unvested options to purchase common shares held by Mr. Schorsch (1,515,625), Mr. Blumenthal (468,750), Mr. Ciorletti (150,000), Ms. Huffman (125,000), Mr. Kahn (120,000), Mr. Matey (37,500), Ms. Schorsch (100,000) and Mr. Ranieri (150,000).

(4) Consists of restricted common shares.

(5) Mr. Kahn’s shares consist of 60,000 restricted common shares and units of our operating partnership convertible for 341,650 common shares.

(6) Ms. Schorsch’s shares consist of 47,000 restricted common shares, 209,050 common shares held by trusts for the benefit of Ms. Schorsch’s children and 2,969,510 common shares held by Ms. Schorsch’s spouse, Nicholas S. Schorsch, our President, CEO and Vice Chairman of our board of trustees. See Note (2) above.

(7) Mr. Ranieri’s shares consist of 300,000 common shares and 150,000 restricted common shares.

(8) Mr. Faulkner’s shares consist of 20,000 restricted common shares and units of our operating partnership convertible for 439,556 common shares.

(9) Mr. Kraemer’s shares consist of 15,000 common shares held with his spouse as tenants-in-common and 20,000 restricted common shares.

(10) Mr. Tonkel’s shares consist of units of our operating partnership convertible for 85,000 common shares. These units were transferred to Mr. Tonkel by Friedman, Billings, Ramsey & Co., Inc. See “Certain Relationships and Related Transactions.”

(11) Consists of 1,579,708 common shares, 209,050 common shares held by trusts for the behalf of the Schorschs’ children, 1,351,000 restricted common shares and units of our operating partnership convertible for 1,971,008 common shares.

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Selling Shareholders

The following table sets forth the beneficial ownership of common shares by the selling shareholders as of             , 2003, the maximum number of common shares being offered by the selling shareholders under this prospectus and the beneficial ownership of common shares by the selling shareholders on             , 2003 as adjusted to give effect to the sale of the common shares offered by this prospectus. The SEC has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that the shareholder has the right to acquire within 60 days after that date through (a) the exercise of any option, warrant or right, (b) the conversion of a security, (c) the power to revoke a trust, discretionary account or similar arrangement, or (d) the automatic termination of a trust, discretionary account or similar arrangement. Shares may also be sold by donees, pledgees or other transferees or successors in interest of the selling shareholders.

	Number of Shares Beneficially Owned	Maximum Number of Shares Being Offered	Percentage of All Common Shares Beneficially Owned Before Resale	Beneficial Ownership After Resale of Shares
Selling Shareholder				Number of Shares	Percentage

* Represents less than 1%.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Related Party Benefits

Person Receiving the Benefit

Nature and Amount of Benefit

Nicholas S. Schorsch, our President, Chief Executive Officer and Vice Chairman of our board of trustees

Nicholas S. Schorsch controls First States Wilmington, L.P., or FSW, the entity that owns the Three Beaver Valley Road property in Wilmington, Delaware and from which we acquired an option to purchase all of its limited and general partnership interests in May 2002. We acquired this option in return for a loan by our operating partnership to FSW, which has since been repaid. See “Our Business and Properties—Option Agreement.” In addition, Mr. Schorsch was one of the sellers of 89% of the limited partnership interests in FS Partners II, the entity that owns our 123 South Broad Street property, that we acquired in September 2002. Mr. Schorsch beneficially owned 45.5% of the limited partnership interests that we acquired and received approximately $3.5 million as consideration for the sale of his interests. Mr. Schorsch continues to beneficially own a 45.5% limited partnership interest in FS Partners II. Although our operating partnership controls the decisions relating to the operations of FS Partners II in its capacity as the owner of the general partner of FS Partners II, the owners of a majority of the 11% partnership interests retain the right to approve certain major transactions involving 123 South Broad Street, including its sale, assignment or refinancing. Because Mr. Schorsch controls a large portion of the 11% minority interest in FS Partners II, he has the ability to significantly influence the approval of major transactions involving 123 South Broad Street. See “Our Business and Properties—Our Properties.” Mr. Schorsch’s spouse, Shelley D. Schorsch, is our Senior Vice President—Corporate Affairs, and is also a party to an employment agreement with us, pursuant to which we have agreed to pay her an annual base salary of $125,000 and an annual bonus in the amount of up to two times her annual base salary, consistent with the agreements described under “Management—Employment Agreements.” Ms. Schorsch is also entitled to participate in our 2002 Equity Incentive Plan, pursuant to which we have awarded and may again in the future award to her share options and restricted share awards, and she is also entitled to participate in our Key Employee Incentive Compensation Plan. See “Management—2002 Equity Incentive Plan,” “—2003 Annual Bonus Criteria,” and “—Key Employee Incentive Compensation Plan.”

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Person Receiving the Benefit	Nature and Amount of Benefit
Jeffrey C. Kahn, our Senior Vice President—Acquisitions and Dispositions	Mr. Kahn owns a 33.3% interest in a leasing company that has previously provided leasing services with respect to certain of our initial properties that we acquired in September 2002. We have assumed obligations to pay this leasing company approximately $235,000 in residual leasing commission payments annually over the remaining terms of the leases brokered by this company. The average remaining lease term for these leases is approximately nine years.
	In addition, Mr. Kahn was one of the sellers of 89% of the limited partnership interests in FS Partners II that we acquired in September 2002. Mr. Kahn owned 4.4% of the limited partnership interests that we acquired in this transaction. Mr. Kahn continues to own a 0.5% limited partnership interest in FS Partners II, and in connection with the sale, was issued 33,819 units of our operating partnership. Although our operating partnership controls the decisions relating to the operations of FS Partners II in its capacity as the owner of the general partner of FS Partners II, owners of a majority of the 11% partnership interests retain the right to approve certain major transactions involving 123 South Broad Street, including its sale, assignment or refinancing. See “Our Business and Properties—Our Properties.”
	Mr. Kahn is also a limited partner in FSW, the entity that owns the Three Beaver Valley Road property.
Henry Faulkner, III, a member of our board of trustees	Mr. Faulkner was one of the sellers of 89% of the limited partnership interests in FS Partners II that we acquired in September 2002. Mr. Faulkner owned 6.7% of the limited partnership interests that we acquired in this transaction. Mr. Faulkner continues to own a 0.7% limited partnership interest in FS Partners II, and in connection with the sale, was issued 52,125 units of our operating partnership. Although our operating partnership controls the decisions relating to the operations of FS Partners II in its capacity as the owner of the general partner of FS Partners II, the owners of a majority of the 11% partnership interests retain the right to approve certain major transactions involving 123 South Broad Street, including its sale, assignment or refinancing. See “Our Business and Properties—Our Properties.”
	Mr. Faulkner is also a limited partner in FSW, the entity that owns the Three Beaver Valley Road property.

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Person Receiving the Benefit	Nature and Amount of Benefit
Friedman, Billings, Ramsey & Co., Inc., the co-lead and joint book-running manager of this offering	We and Friedman, Billings, Ramsey & Co., Inc. entered into an Intellectual Property Contribution and Unit Purchase Agreement as of May 24, 2002 pursuant to which Friedman Billings Ramsey contributed to us certain intellectual property and other in-kind capital in exchange for the issuance by our operating partnership to Friedman Billings Ramsey of 750,000 units of our operating partnership. Friedman Billings Ramsey informed us that it has transferred 85,000 of these units to J. Rock Tonkel, Jr., one of our trustees and an Executive Vice President and the Head of Investment Banking at Friedman Billings Ramsey. We have also provided Friedman Billings Ramsey and its transferee with demand and piggyback registration rights relating to the common shares for which these units may be converted, similar to the piggyback registration rights provided to the investors in our private placement of common shares in September 2002. See “Registration Rights and Lock-up Agreements.”
	On May 28, 2002, we and our predecessor entity entered into an engagement letter agreement with Friedman Billings Ramsey pursuant to which we engaged Friedman Billings Ramsey to:
	•	serve as placement agent with respect to our September 2002 private placement of common shares; and
	•	act as financial advisor to us with respect to a variety of other possible future transactions.
	Immediately following our joint engagement on December 17, 2002 of Banc of America Securities LLC and Friedman Billings Ramsey to serve as co-lead, joint book-running managers of this offering, we entered into a new engagement letter with Friedman Billings Ramsey to replace and supersede the May 2002 engagement letter. This new engagement letter agreement gives Friedman Billings Ramsey the right to serve as our exclusive financial advisor with respect to any future extraordinary transaction such as a merger, acquisition outside of the ordinary course of business, sale of all or substantially all of our shares or assets or other business combination transaction we undertake, subject to certain exceptions and conditions, during the engagement term, which expires on the earlier of April 30, 2004 or 12 months after the date of completion of this offering. Friedman Billings Ramsey also has the right under the new engagement letter agreement to participate in future public or private capital transactions, other than traditional bank credit facilities and mortgage financings, that we undertake during the engagement term and to receive customary fees for certain other origination and referral services during the engagement term. We have engaged an affiliate of Friedman Billings Ramsey to assist us with the management of our residential mortgage-backed securities investments. See “Our Business and Properties—Other Types of Investments and Policies.”

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Person Receiving the Benefit

Nature and Amount of Benefit

FBR Asset Investment Corporation, an affiliate of Friedman Billings Ramsey

In connection with a loan that FBR Asset Investment Corporation made to our operating partnership in the principal amount of $5.0 million, which loan has since been repaid, we issued to FBR Asset warrants to purchase up to $25.0 million of our common shares at $9.30 per share, which was the per share offering price of our common shares in our September 2002 private placement less the initial purchaser’s discount. FBR Asset elected to terminate these warrants at the time of our September 2002 private placement and to instead purchase $35.0 million of our common shares in the offering at a price per share equal to $9.30. In addition, we have granted to FBR Asset the right to have one non-voting observer at all of our board meetings, subject to confidentiality and other limitations. Assuming this offering is completed, this right will expire on March 5, 2005. If this offering is not completed, this right will expire on September 10, 2006.

Related Party Leases

We lease 4,000 square feet in a converted bank branch owned by Nicholas S. Schorsch under a lease expiring in July 2009 which has aggregate annual rent of $66,000 in 2002, subject to increases of the greater of 3% or increases in the Consumer Price Index per year through the expiration of the lease. This property is the first bank branch that Mr. Schorsch acquired. We lease 2,500 square feet in an office building owned by Mr. Schorsch’s wife, Shelley D. Schorsch, our Senior Vice President—Corporate Affairs, under a lease with aggregate annual rent of $46,350, which lease expires in 2008 and is subject to annual rent increases of the greater of 3% or the Consumer Price Index. This property is currently for sale.

Related Party Management Services

We currently provide property and asset management services for three bank branches and the Three Beaver Valley Road property, a five-story office building, containing approximately 263,000 rentable square feet, all of which are owned by Mr. Schorsch, Mr. Kahn, Mr. Faulkner and other entities affiliated with them. We collect fees in return for performing these services. The three bank branches are currently under agreement for sale, with closing anticipated within 12 months.

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DESCRIPTION OF SHARES

The following summary of the terms of our shares of beneficial interest does not purport to be complete and is subject to and qualified in its entirety by reference to our declaration of trust and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”

General

Our declaration of trust provides that we may issue up to 500,000,000 common shares of beneficial interest and 100,000,000 preferred shares of beneficial interest, par value $0.001 per share. As of February 14, 2003, 42,498,008 common shares were issued and outstanding, no preferred shares were issued and outstanding, and 4,455,966 common shares were issuable upon conversion of units of our operating partnership. As of February 14, 2003, there were approximately 18 record holders of our common shares. As permitted by the Maryland statute governing real estate investment trusts formed under the laws of that state, referred to as the Maryland REIT Law, our declaration of trust contains a provision permitting our board of trustees, without any action by our shareholders, to amend the declaration of trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of any class of shares of beneficial interest that we have authority to issue.

Maryland law and our declaration of trust provide that none of our shareholders is personally liable for any of our obligations solely as a result of that shareholder’s status as a shareholder.

Voting Rights of Common Shares

Subject to the provisions of our declaration of trust regarding the restrictions on the transfer and ownership of shares of beneficial interest, each outstanding common share entitles the holder to one vote on all matters submitted to a vote of shareholders, including the election of trustees, and, except as provided with respect to any other class or series of shares of beneficial interest, the holders of such common shares possess the exclusive voting power. There is no cumulative voting in the election of trustees, which means that the holders of a plurality of the outstanding common shares, voting as a single class, can elect all of the trustees then standing for election.

Under the Maryland REIT Law, a Maryland REIT generally cannot amend its declaration of trust or merge unless approved by the affirmative vote of shareholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all the votes entitled to be cast on the matter) is set forth in the REIT’s declaration of trust. Our declaration of trust provides for approval by a majority of all the votes entitled to be cast on the matter in all situations permitting or requiring action by the shareholders except with respect to: (a) the election of trustees (which requires a plurality of all the votes cast at a meeting of our shareholders at which a quorum is present); (b) the removal of trustees (which requires the affirmative vote of the holders of two-thirds of our outstanding shares entitled to vote on such matters); and (c) the amendment or repeal of certain designated sections of the declaration of trust (which requires the affirmative vote of two-thirds of our outstanding shares entitled to vote on such matters). Our declaration of trust permits the trustees to amend the declaration of trust from time to time by a vote of two-thirds of the trustees to qualify as a REIT under the Internal Revenue Code or the Maryland REIT Law, without the affirmative vote or written consent of the shareholders.

Dividends, Liquidation and Other Rights

All common shares offered by this prospectus will be duly authorized, fully paid and nonassessable. Holders of our common shares are entitled to receive dividends when authorized by our board of trustees out of assets legally available for the payment of dividends. They also are entitled to share ratably in our assets legally available for distribution to our shareholders in the event of our liquidation, dissolution or winding up, after

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payment of or adequate provision for all of our known debts and liabilities. These rights are subject to the preferential rights of any other class or series of our shares and to the provisions of our declaration of trust regarding restrictions on transfer of our shares.

Holders of our common shares have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of our securities. Subject to the restrictions on transfer of shares contained in our declaration of trust and to the ability of the board of trustees to create common shares with differing voting rights, all common shares will have equal dividend, liquidation and other rights.

Power to Reclassify Shares

Our declaration of trust authorizes our board of trustees to classify any unissued preferred shares and to reclassify any previously classified but unissued common shares and preferred shares of any series from time to time in one or more series, as authorized by the board of trustees. Prior to issuance of shares of each class or series, the board of trustees is required by the Maryland REIT Law and our declaration of trust to set for each such class or series, subject to the provisions of our declaration of trust regarding the restriction on transfer of shares of beneficial interest, the terms, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series. As a result, our board of trustees could authorize the issuance of preferred shares that have priority over the common shares with respect to dividends and rights upon liquidation and with other terms and conditions that could have the effect of delaying, deterring or preventing a transaction or a change in control that might involve a premium price for holders of common shares or otherwise might be in their best interest. As of the date hereof, no preferred shares are outstanding and we have no present plans to issue any preferred shares.

Power to Issue Additional Common Shares or Preferred Shares

We believe that the power to issue additional common shares or preferred shares and to classify or reclassify unissued common shares or preferred shares and thereafter to issue the classified or reclassified shares provides us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. These actions can be taken without shareholder approval, unless shareholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although we have no present intention of doing so, we could issue a class or series of shares that could delay, deter or prevent a transaction or a change in control that might involve a premium price for holders of common shares or otherwise be in their best interests.

Restrictions on Ownership and Transfer

In order to qualify as a REIT under the Internal Revenue Code, our shares of beneficial interest must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made).

Because our board of trustees believes that it is at present essential for us to qualify as a REIT, the declaration of trust, subject to certain exceptions, contains certain restrictions on the number of our shares of beneficial interest that a person may own. Our declaration of trust provides that no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.9%, referred to as the Aggregate Share Ownership Limit, in value of our outstanding shares of beneficial interest. In addition, the declaration of trust prohibits any person from acquiring or holding, directly or indirectly, common shares in excess of 9.9% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding common shares, referred to as the Common Share Ownership Limit.

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Our board of trustees, in its sole discretion, may exempt a proposed transferee from the Aggregate Share Ownership Limit and the Common Share Ownership Limit, referred to as an Excepted Holder. However, the board of trustees may not grant such an exemption to any person if such exemption would result in our being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code or otherwise would result in our failing to qualify as a REIT. In order to be considered by the board of trustees as an Excepted Holder, a person also must not own, directly or indirectly, an interest in a tenant of our company (or a tenant of any entity owned or controlled by us) that would cause us to own, directly or indirectly, more than a 9.9% interest in such a tenant. The person seeking an exemption must represent to the satisfaction of our board of trustees that such holder will not violate the two aforementioned restrictions. The person must also agree that any violation or attempted violation of any of the foregoing restrictions will result in the automatic transfer of the shares causing such violation to the Trust (as defined below). Our board of trustees may require a ruling from the Internal Revenue Service or an opinion of counsel, in either case in form and substance satisfactory to the board of trustees, in its sole discretion, in order to determine or ensure our status as a REIT.

Our declaration of trust further prohibits any person from (a) beneficially or constructively owning our shares of beneficial interest that would result in us being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT, and (b) transferring our shares of beneficial interest if such transfer would result in our shares of beneficial interest being owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of our shares of beneficial interest that will or may violate any of the foregoing restrictions on transferability and ownership, or any person who would have owned our shares of the beneficial interest that resulted in a transfer of shares to the Trust, is required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT. The foregoing restrictions on transferability and ownership will not apply if our board of trustees determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

If any transfer of our shares of beneficial interest occurs which, if effective, would result in any person beneficially or constructively owning shares of beneficial interest in excess or in violation of the above transfer or ownership limitations, referred to as a Prohibited Owner, then that number of shares of beneficial interest the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole share) shall be automatically transferred to a trust, referred to as the Trust, for the exclusive benefit of one or more charitable beneficiaries, referred to as the Charitable Beneficiary, and the Prohibited Owner shall not acquire any rights in such shares. Such automatic transfer shall be deemed to be effective as of the close of business on the Business Day (as defined in the declaration of trust) prior to the date of such violative transfer. Shares of beneficial interest held in the Trust shall be issued and outstanding shares of beneficial interest. The Prohibited Owner shall not benefit economically from ownership of any shares of beneficial interest held in the Trust, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of beneficial interest held in the Trust. The trustee of the Trust, referred to as the Trustee, shall have all voting rights and rights to dividends or other distributions with respect to shares of beneficial interest held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to our discovery that shares of beneficial interest have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares of beneficial interest held in the Trust and, subject to Maryland law, effective as of the date that such shares of beneficial interest have been transferred to the Trust, the Trustee shall have the authority, at the Trustee’s sole discretion, (i) to rescind as void any vote cast by a Prohibited Owner prior to our discovery that such shares have been transferred to the Trust and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary. However, if we have already taken irreversible trust action, then the Trustee shall not have the authority to rescind and recast such vote.

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Within 20 days of receiving notice from us that shares of beneficial interest have been transferred to the Trust, the Trustee shall sell the shares of beneficial interest held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in the declaration of trust. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as follows. The Prohibited Owner shall receive the lesser of (i) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., a gift, devise or other such transaction), the Market Price (as defined in the declaration of trust) of such shares on the day of the event causing the shares to be held in the Trust and (ii) the price per share received by the Trustee from the sale or other disposition of the shares held in the Trust. Any net sale proceeds in excess of the amount payable to the Prohibited Owner shall be paid immediately to the Charitable Beneficiary. If, prior to our discovery that shares of beneficial interest have been transferred to the Trust, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to the aforementioned requirement, such excess shall be paid to the Trustee upon demand.

In addition, shares of beneficial interest held in the Trust shall be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date we, or our designee, accept such offer. We shall have the right to accept such offer until the Trustee has sold the shares of beneficial interest held in the Trust. Upon such a sale to us, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.

All certificates representing our shares of beneficial interest will bear a legend referring to the restrictions described above.

Every owner of more than 5% (or such lower percentage as required by the Internal Revenue Code or the regulations promulgated thereunder) of all classes or series of our shares of beneficial interest, including common shares, within 30 days after the end of each taxable year, is required to give written notice to us stating the name and address of such owner, the number of shares of each class and series of shares of beneficial interest which the owner beneficially owns and a description of the manner in which such shares are held. Each such owner shall provide to us such additional information as we may request in order to determine the effect, if any, of such beneficial ownership on our status as a REIT and to ensure compliance with the Aggregate Share Ownership Limit. In addition, each shareholder shall upon demand be required to provide to us such information as we may request, in good faith, in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.

These ownership limitations could delay, deter or prevent a transaction or a change in control that might involve a premium price for the common shares or otherwise be in the best interest of our shareholders.

Transfer Agent and Registrar

The transfer agent and registrar for our common shares is American Stock Transfer & Trust Co.

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CERTAIN PROVISIONS OF MARYLAND LAW AND  OF OUR DECLARATION OF TRUST AND BYLAWS

The following description of certain provisions of Maryland law and of our declaration of trust and bylaws is only a summary. For a complete description, we refer you to Maryland law, our declaration of trust and bylaws. Copies of our declaration of trust and bylaws are filed as exhibits to the registration statement of which this prospectus is a part.

Number of Trustees; Vacancies

Our declaration of trust and bylaws provide that the number of our trustees shall be initially seven, and may only be increased or decreased by a vote of a majority of the members of our board of trustees. We intend to increase the number of our trustees to nine prior to the completion of this offering. Our bylaws provide that any vacancy, including a vacancy created by an increase in the number of trustees, may be filled only by a majority of the remaining trustees, even if the remaining trustees do not constitute a quorum.

Our bylaws provide that at least two-thirds of our trustees will be “independent,” with independence being defined in the manner established by our board of trustees and in a manner consistent with listing standards established by the New York Stock Exchange, and will be nominated by our nominating and corporate governance committee. Pursuant to our bylaws, Mr. Schorsch will have the right, so long as he is our chief executive officer, to nominate our current or former executive officers to fill the remaining one-third of the positions on our board. These nominations must be submitted to and approved by the members of our corporate governance and nominating committee, and satisfy the standards established by that committee for membership on our board.

Classification of Our Board of Trustees

Pursuant to our declaration of trust, our board of trustees is divided into three classes of trustees. Trustees of each class are elected for a three year term, and each year one class of trustees will be elected by the shareholders. The initial terms of the Class I, Class II and Class III trustees will expire in 2003, 2004 and 2005, respectively, and when their respective successors are duly elected and qualify. Any trustee elected to fill a vacancy shall serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is elected and qualifies. We believe that classification of our board of trustees helps to assure the continuity and stability of our business strategies and policies as determined by our trustees. Holders of common shares have no right to cumulative voting in the election of trustees. Consequently, at each annual meeting of shareholders, the holders of a plurality of the common shares are able to elect all of the successors of the class of trustees whose terms expire at that meeting.

The classified board provision could have the effect of making the replacement of incumbent trustees more time consuming and difficult. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of our board of trustees. Thus, the classified board provision could increase the likelihood that incumbent trustees will retain their positions. The staggered terms of trustees may delay, deter or prevent a tender offer or an attempt to change control in us or another transaction that might involve a premium price for holders of common shares that might be in the best interest of our shareholders.

Removal of Trustees

Our declaration of trust provides that a trustee may be removed, with or without cause, upon the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of trustees. Absent removal of all of our trustees, this provision, when coupled with the provision in our bylaws authorizing our board of trustees to fill vacant trusteeships, precludes shareholders from removing incumbent trustees and filling the vacancies created by such removal with their own nominees, except upon the affirmative vote of at least two-thirds of the votes entitled to vote.

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Business Combinations

Maryland law prohibits “business combinations” between us and an interested shareholder or an affiliate of an interested shareholder for five years after the most recent date on which the interested shareholder becomes an interested shareholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Maryland law defines an interested shareholder as:

• any person who beneficially owns 10% or more of the voting power of our shares; or

• an affiliate or associate of ours who, at any time within the two year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding voting shares.

A person is not an interested shareholder if our board of trustees approves in advance the transaction by which the person otherwise would have become an interested shareholder. However, in approving a transaction, our board of trustees may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by our board of trustees.

After the five year prohibition, any business combination between us and an interested shareholder generally must be recommended by our board of trustees and approved by the affirmative vote of at least:

• 80% of the votes entitled to be cast by holders of our then outstanding shares of beneficial interest; and

• two-thirds of the votes entitled to be cast by holders of our voting shares other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or shares held by an affiliate or associate of the interested shareholder.

These super-majority vote requirements do not apply if our common shareholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested shareholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are approved by the board of trustees before the time that the interested shareholder becomes an interested shareholder.

The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Control Share Acquisitions

Maryland law provides that “control shares” of a Maryland REIT acquired in a “control share acquisition” have no voting rights unless approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, or by officers or trustees who are our employees are excluded from the shares entitled to vote on the matter. “Control shares” are voting shares that, if aggregated with all other shares previously acquired by the acquiring person, or in respect of which the acquiring person is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiring person to exercise voting power in electing trustees within one of the following ranges of voting power:

• one-tenth or more but less than one-third;

• one-third or more but less than a majority; or

• a majority or more of all voting power.

Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions.

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A person who has made or proposes to make a control share acquisition may compel our board of trustees to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, we may present the question at any shareholders’ meeting.

If voting rights are not approved at the shareholders’ meeting or if the acquiring person does not deliver the statement required by Maryland law, then, subject to certain conditions and limitations, we may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value. Fair value is determined without regard to the absence of voting rights for the control shares and as of the date of the last control share acquisition or of any meeting of shareholders at which the voting rights of the shares were considered and not approved. If voting rights for control shares are approved at a shareholders’ meeting, the acquiror may then vote a majority of the shares entitled to vote, and all other shareholders may exercise appraisal rights. The fair value of the shares for purposes of these appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if we are a party to the transaction, nor does it apply to acquisitions approved by or exempted by our declaration of trust or bylaws.

Our bylaws contain a provision exempting the application of the control share acquisition statute to any and all acquisitions by any person of our shares of beneficial interest. There can be no assurance that this provision will not be amended or eliminated at any time in the future, and may be amended or eliminated with retroactive effect.

Merger, Amendment of Declaration of Trust

Under Maryland REIT law, a Maryland REIT generally cannot dissolve, amend its declaration of trust or merge with another entity unless approved by the affirmative vote of shareholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage, but not less than a majority of all the votes entitled to be cast on the matter, is set forth in the REIT’s declaration of trust. Our declaration of trust provides for approval by a majority of all the votes entitled to be cast on the matter for the matters described in this paragraph, except for amendments to various provisions of the declaration of trust, the approval of which requires the affirmative vote of the holders of two-thirds of the votes entitled to be cast on the matter. Under the Maryland REIT law and our declaration of trust, our trustees are permitted, by a two-thirds vote, without any action by our shareholders, to amend the declaration of trust from time to time to qualify as a REIT under the Internal Revenue Code or the Maryland REIT law without the affirmative vote or written consent of the shareholders. As permitted by the Maryland REIT law, our declaration of trust contains a provision permitting our trustees, without any action by our shareholders, to amend the declaration of trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of any class of shares of beneficial interest that we have authority to issue.

Limitation of Liability and Indemnification

Our declaration of trust limits the liability of our trustees and officers for money damages, except for liability resulting from:

• actual receipt of an improper benefit or profit in money, property or services; or

• a final judgment based upon a finding of active and deliberate dishonesty by the trustee that was material to the cause of action adjudicated.

Our declaration of trust authorizes us, to the maximum extent permitted by Maryland law, to indemnify, and to pay or reimburse reasonable expenses to, any of our present or former trustees or officers or any individual who, while a trustee or officer and at our request, serves or has served another entity, employee benefit plan or

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any other enterprise as a trustee, director, officer, partner or otherwise. The indemnification covers any claim or liability against the person. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present or former trustee or officer who is made a party to a proceeding by reason of his or her service to us.

Maryland law permits us to indemnify our present and former trustees and officers against liabilities and reasonable expenses actually incurred by them in any proceeding unless:

• the act or omission of the trustee or officer was material to the matter giving rise to the proceeding; and

• was committed in bad faith; or

• was the result of active and deliberate dishonesty;

• the trustee or officer actually received an improper personal benefit in money, property or services; or

• in a criminal proceeding, the trustee or officer had reasonable cause to believe that the act or omission was unlawful.

However, Maryland law prohibits us from indemnifying our present and former trustees and officers for an adverse judgment in a derivative action or if the trustee or officer was adjudged to be liable for an improper personal benefit. Our bylaws and Maryland law require us, as a condition to advancing expenses in certain circumstances, to obtain:

• a written affirmation by the trustee or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification; and

• a written undertaking to repay the amount reimbursed if the standard of conduct is not met.

Operations

We generally are prohibited from engaging in certain activities, including acquiring or holding property or engaging in any activity that would cause us to fail to qualify as a REIT.

Term and Termination

Our declaration of trust provides for us to have a perpetual existence. Pursuant to our declaration of trust, and subject to the provisions of any of our classes or series of shares of beneficial interest then outstanding and the approval by a majority of the entire board of trustees, our shareholders, at any meeting thereof, by the affirmative vote of a majority of all of the votes entitled to be cast on the matter, may approve a plan of liquidation and dissolution.

Meetings of Shareholders

Under our bylaws, annual meetings of shareholders are to be held in June of each year at a date and time as determined by our board of trustees. Special meetings of shareholders may be called only by a majority of the trustees then in office, by the Chairman of our board of trustees, our President or our Chief Executive Officer, and must be called by our Secretary upon the written request of the shareholders entitled to cast not less than a majority of all the voted entitled to be cast at such meeting. Only matters set forth in the notice of the special meeting may be considered and acted upon at such a meeting. Our bylaws provide that any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting by unanimous written consent, if that consent sets forth that action and is signed by each shareholder entitled to vote on the matter.

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Advance Notice of Trustee Nominations and New Business

Our bylaws provide that, with respect to an annual meeting of shareholders, nominations of persons for election to our board of trustees and the proposal of business to be considered by shareholders at the annual meeting may be made only:

• pursuant to our notice of the meeting;

• by our board of trustees; or

• by a shareholder who was a shareholder of record both at the time of the provision of notice and at the time of the meeting who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws.

With respect to special meetings of shareholders, only the business specified in our notice of meeting may be brought before the meeting of shareholders and nominations of persons for election to our board of trustees may be made only:

• pursuant to our notice of the meeting;

• by our board of trustees; or

• provided that our board of trustees has determined that trustees shall be elected at such meeting, by a shareholder who was a shareholder of record both at the time of the provision of notice and at the time of the meeting who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws.

The purpose of requiring shareholders to give advance notice of nominations and other proposals is to afford our board of trustees the opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposals and, to the extent considered necessary by our board of trustees, to inform shareholders and make recommendations regarding the nominations or other proposals. The advance notice procedures also permit a more orderly procedure for conducting our shareholder meetings. Although the bylaws do not give our board of trustees the power to disapprove timely shareholder nominations and proposals, they may have the effect of precluding a contest for the election of trustees or proposals for other action if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of trustees to our board of trustees or to approve its own proposal.

Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws

The business combination, fiduciary duty and control share acquisition provisions of Maryland law (if the applicable provision in our bylaws is rescinded); the provisions of our declaration of trust on classification of our board of trustees, the removal of trustees and the restrictions on the transfer of shares of beneficial interest; and the advance notice provisions of our bylaws could have the effect of delaying, deterring or preventing a transaction or a change in the control that might involve a premium price for holders of the common shares or otherwise be in their best interest. The “unsolicited takeovers” provisions of the MGCL permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement takeover defenses that we may not yet have.

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PARTNERSHIP AGREEMENT

The following summary of our operating partnership and the amended and restated agreement of limited partnership of our operating partnership describes material provisions of the partnership agreement. This summary is qualified in its entirety by reference to the partnership agreement, which is filed as an exhibit to the registration statement of which this prospectus is a part.

Management

Our operating partnership, has been organized as a Delaware limited partnership. Pursuant to the partnership agreement, as the owner of the sole general partner of the operating partnership, we have, subject to certain protective rights of limited partners described below, full, exclusive and complete responsibility and discretion in the management and control of the partnership, including the ability to cause the partnership to enter into certain major transactions including acquisitions, dispositions, refinancings and selection of lessees and to cause changes in the partnership’s line of business and distribution policies. However, any amendment to the partnership agreement that would affect the conversion rights of the limited partners or otherwise adversely affect the rights of the limited partners requires the consent of limited partners, other than us, holding more than 50% of the units of our operating partnership held by such partners.

The affirmative vote of at least two-thirds of the limited partnership units of our operating partnership, excluding those held by us, is required for a sale of all or substantially all of the assets of the partnership, or to approve a merger or consolidation of the partnership. Upon completion of this offering, we will own approximately             % of the partnership interests, including the 0.5% general partnership interest.

Transferability of Interests

In general, we may not voluntarily withdraw from the partnership or transfer or assign our interest in the partnership without the consent of the holders of a majority of the units of our operating partnership, excluding those held by us, unless the transaction in which such withdrawal or transfer occurs results in the limited partners receiving property in an amount equal to the amount they would have received had they exercised their conversion rights immediately prior to such transaction, or unless our successor contributes substantially all of its assets to the partnership in return for a general partnership interest or limited partnership interest in the partnership. With certain limited exceptions, the limited partners may not transfer their interests in the partnership, in whole or in part, without our written consent, which consent may be withheld in our sole discretion. We may not consent to any transfer that would cause the partnership to be treated as a corporation for federal income tax purposes.

Capital Contribution

The partnership agreement provides that if the partnership requires additional funds at any time in excess of funds available to the partnership from borrowing or capital contributions, we may borrow these funds from a financial institution or other lender and lend these funds to the partnership. Under the partnership agreement, we are obligated to contribute the proceeds of any offering of shares of beneficial interest as additional capital to the partnership. We are authorized to cause the partnership to issue partnership interests for less than fair market value if we have concluded in good faith that such issuance is in both the partnership’s and our best interests. If we contribute additional capital to the partnership, we will receive additional partnership interests and our percentage interest will be increased on a proportionate basis based upon the amount of such additional capital contributions and the value of the partnership at the time of such contributions. Conversely, the percentage interests of the limited partners will be decreased on a proportionate basis in the event of additional capital contributions by us. In addition, if we contribute additional capital to the partnership, we will revalue the property of the partnership to its fair market value as determined by us, and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property that has not been reflected in the capital accounts previously would be allocated among the partners under the terms of the

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partnership agreement if there were a taxable disposition of this property for fair market value on the date of the revaluation. Our operating partnership could issue preferred partnership interests in connection with acquisitions of property or otherwise, which would have priority over common partnership interests with respect to distributions from the partnership, including the partnership interests that our wholly-owned subsidiary owns as general partner.

Conversion Rights

Pursuant to the partnership agreement, the limited partners, other than us, have conversion rights, which enable them, beginning 12 months after the date of receipt of limited partnership interests (except, with respect to the persons who received limited partnership interests from us in our formation transactions, beginning on March 10, 2003, which is six months after completion of our private placement), to cause us to convert their units into common shares on a one-for-one basis, subject to adjustments for stock splits, dividends, recapitalizations and similar events, or, at our option, to redeem their units for a cash amount equal to the value of the common shares for which the units would otherwise be converted. Notwithstanding the foregoing, a limited partner shall not be entitled to exercise its conversion rights to the extent that the issuance of common shares to the converting limited partner would:

• result in any person owning, directly or indirectly, common shares in excess of the ownership limitation as per our declaration of trust;

• result in our shares of beneficial interest being owned by fewer than 100 persons, as determined without reference to any rules of attribution;

• result in our being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code;

• cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant of our or the partnership’s real property, within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code; or

• be likely to cause the acquisition of common shares by such redeeming limited partner to be “integrated” with any other distribution of common shares or units of our operating partnership for purposes of complying with the Securities Act.

In all cases, however,

• each limited partner may not exercise the conversion right for fewer than 1,000 units of our operating partnership or, if such limited partner holds fewer than 1,000 units, all of the units held by such limited partner;

• each limited partner may not exercise the conversion right with respect to more than the number of units that would, upon conversion, result in such limited partner or any other person owning, directly or indirectly, common shares in excess of the applicable ownership limitation; and

• each limited partner may not exercise the conversion right more than two times annually.

As of February 14, 2003, the aggregate number of common shares issuable upon exercise of the conversion rights was approximately 4,455,966. The number of common shares issuable upon exercise of the conversion rights will be adjusted to account for share splits, mergers, consolidations or similar pro rata share transactions.

The partnership agreement requires that the partnership be operated in a manner that enables us to satisfy the requirements for being classified as a REIT, to avoid any federal income or excise tax liability imposed by the Internal Revenue Code, other than any federal income tax liability associated with our retained capital gains, and to ensure that the partnership will not be classified as a “publicly traded partnership” taxable as a corporation under Section 7704 of the Internal Revenue Code.

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In addition to the administrative and operating costs and expenses incurred by the partnership, the partnership will pay all of our administrative costs and expenses and these expenses will be treated as expenses of the partnership. Our expenses generally include:

• all expenses relating to our continuity of existence;

• all expenses relating to offerings and registration of securities;

• all expenses associated with the preparation and filing of any of our periodic reports under federal, state or local laws or regulations;

• all expenses associated with our compliance with laws, rules and regulations promulgated by any regulatory body; and

• all of our other operating or administrative costs incurred in the ordinary course of business on behalf of the partnership.

Distributions

The partnership agreement provides that the partnership will make cash distributions in amounts and at such times as determined by us in our sole discretion, to us and the other limited partners in accordance with the respective percentage interests of the partners in the partnership.

Upon liquidation of the partnership, after payment of, or adequate provision for, debts and obligations of the partnership, including any partner loans, any remaining assets of the partnership will be distributed to us and the other limited partners with positive capital accounts in accordance with the respective positive capital account balances of the partners.

Allocations

Profits and losses of the partnership, including depreciation and amortization deductions, for each fiscal year generally are allocated to us and the other limited partners in accordance with the respective percentage interests of the partners in the partnership. All of the foregoing allocations are subject to compliance with the provisions of Internal Revenue Code Sections 704(b) and 704(c) and Treasury Regulations promulgated thereunder. The partnership will use the “traditional method” under Internal Revenue Code Section 704(c) for allocating items with respect to which the fair market value at the time of contribution differs from the adjusted tax basis at the time of contribution.

Term

The partnership will have perpetual existence, unless dissolved upon:

• our bankruptcy, dissolution or withdrawal (unless the limited partners elect to continue the partnership);

• the passage of 90 days after the sale or other disposition of all or substantially all the assets of the partnership;

• the conversion of all units of our operating partnership, other than those held by us, if any; or

• an election by us in our capacity as the owner of the sole general partner of our operating partnership.

Tax Matters

Pursuant to the partnership agreement, the general partner is the tax matters partner of the partnership. Accordingly, through our ownership of the general partner of our operating partnership, we have authority to handle tax audits and to make tax elections under the Internal Revenue Code on behalf of the partnership.

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REGISTRATION RIGHTS AND LOCK-UP AGREEMENTS

In accordance with registration rights agreements that we entered into at the time of our formation transactions and September 2002 private placement with various holders of our common shares and units of our operating partnership, we have:

• agreed to include shares held by some of these holders in this offering; and

• have filed a registration statement under the Securities Act covering the resale of common shares not included in this offering, which we refer to as the resale registration statement.

We will use our best commercially practicable efforts to cause the resale registration statement to be declared effective as promptly as practicable following the date of this prospectus.

At the request of the underwriters, various holders of our common shares and units of our operating partnership have entered into lock-up agreements that prohibit them from selling, contracting to sell or otherwise disposing of or hedging their common shares and units for specified periods of time following the date of this prospectus. These registration statements and lock-up agreements are described in detail below. The summaries of the registration rights agreements are not complete and are subject to and qualified in their entireties by reference to the registration rights agreements, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”

Arrangements with Current Shareholders and Operating Partnership Unitholders

Inclusion of Common Shares in this Offering.    On January 23, 2003, we sent to all of our shareholders, as reflected in our books and records as of that date, notice of our intention to file a registration statement with the SEC for this offering. We sent this notice pursuant to registration rights agreements between us and our shareholders, under which the shareholders have the right to sell in this offering all or a portion of their common shares, subject to various rights of the underwriters and other conditions referred to below.

Because this offering is underwritten, these registration rights agreements:

• require the selling shareholders to enter into the underwriting agreement for this offering;

• permit the underwriters, based on marketing factors, to limit the number of shares a selling shareholder can sell in this offering; and

• condition the selling shareholders’ participation in this offering on compliance with applicable provisions of the registration rights agreement.

As of February    , 2003 we have received notices from shareholders to include              common shares in this offering.

Resale Registration Statement.    Under our registration rights agreement with the holders of common shares purchased in our September 2002 private placement, we are required to file with the SEC, no later than June 6, 2003, a registration statement registering for resale under the Securities Act the common shares they purchased in the private placement. Accordingly, we will file a resale registration statement covering the resale of any of these common shares not included in this offering. After filing this resale registration statement, we will use our best commercially practicable efforts to cause it to be declared effective as promptly as practicable following the date of this prospectus.

We have agreed to maintain the effectiveness of the resale registration statement until the later of:

• the first trading day after 90 days have elapsed following the effective date of the resale registration statement, not including days we have prohibited the selling shareholders from selling shares; and

• September 10, 2003.

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We will also include in the resale registration statement common shares issuable upon the conversion of units of our operating partnership. Pursuant to our partnership agreement and resolutions adopted by our board of trustees, authorizing us to act in our capacity as the sole member of First States Group, LLC, which is the general partner of our operating partnership, unitholders of our operating partnership are prohibited from converting their units into shares until March 10, 2003.

The plan of distribution included in the resale registration statement will cover resales into the market and will also cover all other possible types of distributions by the selling shareholders, including firm underwritten offerings, bought transactions and block trades. We are obligated to file any necessary prospectus supplements to facilitate any particular firm underwriting that may be arranged by any selling shareholders.

We may suspend sales under the resale registration statement by the selling shareholders holding common shares issued in our private placement for up to 60 days in any 12 month period during the pendency of merger negotiations or other undisclosed material events, and up to an additional 90 days per year to effectuate any lock-up requested by the managing underwriter(s) of a public offering of our common shares. In addition, we may suspend sales by the selling shareholders holding common shares issuable upon conversion of units of our operating partnership for up to 45 days per occurrence and an aggregate of 90 days in any 12 month period during the pendency of merger negotiations or other undisclosed material events.

Lock-Up Agreements

Trustees, Executive Officers and Related Parties.    On September 3, 2002, all of our executive officers and trustees entered into an agreement with Friedman, Billings, Ramsey & Co., Inc., in its capacity as the initial purchaser in our September 2002 private placement, pursuant to which each of these individuals agreed that he or she will not, without the prior written approval of Friedman, Billings, Ramsey & Co., Inc., directly or indirectly, sell, offer, contract or grant any option to sell (including, without limitation, any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act, or otherwise dispose of any common shares, options or warrants to acquire common shares, or other securities exchangeable or exercisable for or convertible into common shares owned either of record or beneficially (as defined in Rule 13d-3 under the Securities Exchange Act) by the undersigned (other than as a bona fide gift, provided that the donee thereof agrees in writing to be bound by the September 3, 2002 lock-up agreement), or publicly announce that individual’s intention to do any of the foregoing, for a period commencing on September 3, 2002 and ending on September 2, 2003.

In addition, under the underwriting agreement for this offering, we, our trustees, our executive officers and FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc., have entered into lock-up agreements with the underwriters under which we and each of these securityholders may not, for a period of 180 days after the date of this prospectus, without the prior written approval of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., offer, sell, contract to sell or otherwise dispose of or hedge our common shares or securities convertible into or exchangeable for our common shares.

Other Shareholders.    All shareholders whose shares will be included in the resale registration statement are restricted from, without the prior written consent of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., directly or indirectly offering, selling, contracting to sell or otherwise disposing of or hedging their common shares covered by that registration statement for 45 days following the date of this prospectus. This 45 day lock-up period will automatically terminate, however, upon the later to occur of (i) exercise in full of the underwriters’ over-allotment option and (ii) the fifth consecutive day on which the closing price of our common shares on the New York Stock Exchange equals at least 120% of the public offering price of our common shares, or $            .

Operating Partnership Unitholders.    Holders of units of our operating partnership will be prohibited from, without the prior written consent of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., directly or indirectly, offering, selling, contracting to sell or otherwise disposing of or hedging their common shares and securities convertible into or exchangeable for our common shares for a period of 45 days after the date of this prospectus. In the case of Friedman, Billings, Ramsey & Co., Inc., this period will be 180 days.

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FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT

This section summarizes the current federal income tax issues that you, as a shareholder, may consider relevant. Because this section is a general summary, it does not address all of the potential tax issues that may be important to you. Morgan Lewis & Bockius LLP has acted as our counsel, has reviewed this summary, and is of the opinion that the discussion contained herein fairly summarizes the federal income tax consequences that are likely to be material to a holder of our common shares. The discussion does not address all aspects of taxation that may be relevant to particular shareholders in light of their personal investment or tax circumstances, or to certain types of shareholders that are subject to special treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations (except to the limited extent discussed in “Federal Income Tax Consequences of Our Status as a REIT—Taxation of Tax-Exempt Shareholders”), financial institutions or broker-dealers, and non-U.S. individuals and foreign corporations (except to the limited extent discussed in “Federal Income Tax Consequences of Our Status as a REIT — Taxation of Non-U.S. Shareholders”).

The statements in this section and the opinion of Morgan Lewis, referred to as the Tax Opinion, are based on the current federal income tax laws governing qualification as a REIT. We cannot assure you that new laws, interpretations of law or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate.

This section is not a substitute for careful tax planning. You should consult your own tax advisor regarding the specific tax consequences to you of ownership of our common shares and of our election to be taxed as a REIT. Specifically, you should consult your own tax advisor regarding the federal, state, local, foreign, and other tax consequences to you regarding the purchase, ownership and sale of common shares. You should also consult with your tax advisor regarding the impact of potential changes in the applicable tax laws.

Taxation of Our Company

We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our initial short taxable year ending December 31, 2002. We believe that we are organized and have operated in such a manner to enable us to qualify for taxation as a REIT under the Internal Revenue Code. We further believe that our proposed future method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on our continuing to satisfy numerous asset, income and distribution tests described below, the satisfaction of which depends, in part, on our operating results.

The sections of the Internal Revenue Code relating to qualification and operation as a REIT, and the federal income taxation of a REIT and its shareholders, are highly technical and complex. The following discussion sets forth only the material aspects of those sections. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions and the related rules and regulations.

Morgan Lewis has opined that, for Federal income tax purposes, we have properly elected and otherwise qualified to be taxed as a REIT under the Internal Revenue Code commencing with our initial short taxable year ended December 31, 2002, and our current and proposed method of operations as described in this prospectus and as represented to Morgan Lewis by us will enable us to continue to satisfy the requirements for such qualification and taxation as a REIT under the Internal Revenue Code for future taxable years. This opinion, however, is based upon factual assumptions and representations made by us. Moreover, such qualification and taxation as a REIT depend upon our ability to meet, for each taxable year, various tests imposed under the Internal Revenue Code as discussed below, and Morgan Lewis has not reviewed in the past, and may not review in the future, our compliance with these tests. Those qualification tests involve the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of our

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share ownership, and the percentage of our earnings that we distribute. Morgan Lewis will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that the actual results of our operation for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of our failure to qualify as a REIT. See “Federal Income Tax Consequences of Our Status as a REIT—Failure to Qualify.”

As a REIT, we generally are not subject to federal income tax on the taxable income that we distribute to our shareholders. The benefit of that tax treatment is that it avoids the “double taxation,” or taxation at both the corporate and shareholder levels, that generally results from owning shares in a corporation. However, we will be subject to federal tax in the following circumstances:

• We are subject to the corporate federal income tax on taxable income, including net capital gain, that we do not distribute to shareholders during, or within a specified time period after, the calendar year in which the income is earned.

• We are subject to the corporate “alternative minimum tax” on any items of tax preference that we do not distribute or allocate to shareholders.

• We are subject to tax, at the highest corporate rate, on:

— net income from the sale or other disposition of property acquired through foreclosure (“foreclosure property”) that we hold primarily for sale to customers in the ordinary course of business, and

— other non-qualifying income from foreclosure property.

• We are subject to a 100% tax on net income from sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business.

• If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under “Federal Income Tax Consequences of Our Status as a REIT — Requirements for Qualification — Income Tests,” but nonetheless continue to qualify as a REIT because we meet other requirements, we will be subject to a 100% tax on:

— the greater of (1) the amount by which we fail the 75% test, or (2) the excess of 90% of our gross income over the amount of gross income attributable to sources that qualify under the 95% test, multiplied by

— a fraction intended to reflect our profitability.

• If we fail to distribute during a calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain net income for the year, and (3) any undistributed taxable income from earlier periods, then we will be subject to a 4% excise tax on the excess of the required distribution over the amount we actually distributed.

• We may elect to retain and pay income tax on our net long-term capital gain. In that case, a U.S. shareholder would be taxed on its proportionate share of our undistributed long-term capital gain (to the extent that we make a timely designation of such gain to the shareholder) and would receive a credit or refund for its proportionate share of the tax we paid.

• We will be subject to a 100% excise tax on transactions with a taxable REIT subsidiary that are not conducted on an arm’s-length basis.

• If we acquire any asset from a “C corporation” (that is, a corporation generally subject to the full corporate-level tax) in a transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we recognize gain on the disposition of the asset during the 10 year period beginning on the date that we acquired the asset, then the asset’s “built-in” gain will be subject to tax at the highest regular corporate rate.

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Requirements for Qualification

To qualify as a REIT, we must elect to be treated as a REIT, and we must meet various (a) organizational requirements, (b) gross income tests, (c) asset tests, and (d) annual distribution requirements.

Organizational Requirements.    A REIT is a corporation, trust or association that meets each of the following requirements:

(1) It is managed by one or more trustees or directors;

(2) Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest;

(3) It would be taxable as a domestic corporation, but for Sections 856 through 860 of the Internal Revenue Code;

(4) It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws;

(5) At least 100 persons are beneficial owners of its shares or ownership certificates (determined without reference to any rules of attribution);

(6) Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during the last half of any taxable year; and

(7) It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the Internal Revenue Service that must be met to elect and maintain REIT status.

We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than  12 months. If we comply with all the requirements for ascertaining information concerning the ownership of our outstanding shares in a taxable year and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year. Our declaration of trust provides for restrictions regarding the ownership and transfer of the common shares so that we should continue to satisfy these requirements. The provisions of the declaration of trust restricting the ownership and transfer of the common shares are described in “Description of Shares of Beneficial Interest—Restrictions on Ownership and Transfer.”

For purposes of determining share ownership under requirement 6, an “individual” generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the federal income tax laws, and beneficiaries of such a trust will be treated as holding our shares in proportion to their actuarial interests in the trust for purposes of requirement 6.

A corporation that is a “qualified REIT subsidiary,” or QRS, is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A “qualified REIT subsidiary” is a corporation, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any “qualified REIT subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.

An unincorporated domestic entity, such as a partnership, that has a single owner, generally is not treated as an entity separate from its parent for federal income tax purposes. An unincorporated domestic entity with two or

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more owners is generally treated as a partnership for federal income tax purposes. In the case of a REIT that is a partner in a partnership that has other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. Thus, our proportionate share of the assets, liabilities and items of income of our operating partnership and any other partnership, joint venture, or limited liability company that is treated as a partnership for federal income tax purposes in which we acquire an interest, directly or indirectly, is treated as our assets and gross income for purposes of applying the various REIT qualification requirements.

A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries” or TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis. We may engage in activities indirectly though a TRS as necessary or convenient to avoid obtaining the benefit of income or services that would jeopardize our REIT status if we engaged in the activities directly. In particular, we would likely engage in activities through a TRS if we wished to provide services to unrelated parties which might produce income that does not qualify under the gross income tests described below. We might also dispose of an unwanted asset through a TRS as necessary or convenient to avoid the 100% tax on income from prohibited transactions. See description below under “Prohibited Transactions.”

Gross Income Tests.    We must satisfy two gross income tests annually to maintain our qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or qualified temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes:

• rents from real property;

• interest on debt secured by mortgages on real property, or on interests in real property;

• dividends or other distributions on, and gain from the sale of, shares in other REITs;

• gain from the sale of real estate assets; and

• income derived from the temporary investment of new capital that is attributable to the issuance of our shares of beneficial interest or a public offering of our debt with a maturity date of at least five years and that we receive during the one year period beginning on the date on which we received such new capital.

Second, in general, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, income from certain hedging instruments or any combination of these. Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both income tests. The following paragraphs discuss the specific application of the gross income tests to us.

Rents from Real Property.    Rent that we receive from our real property will qualify as “rents from real property,” which is qualifying income for purposes of the 75% and 95% gross income tests, only if the following conditions are met.

First, the rent must not be based in whole or in part on the income or profits of any person. Participating rent, however, will qualify as “rents from real property” if it is based on percentages of receipts or sales and the percentages:

• are fixed at the time the leases are entered into;

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• are not renegotiated during the term of the leases in a manner that has the effect of basing rent on income or profits; and

• conform with normal business practice.

More generally, the rent will not qualify as “rents from real property” if, considering the relevant lease and all the surrounding circumstances, the arrangement does not conform with normal business practice, but is in reality used as a means of basing the rent on income or profits. We have represented to Morgan Lewis that we intend to set and accept rents which are fixed dollar amounts or a fixed percentage of gross revenue, and not to any extent by reference to any person’s income or profits, in compliance with the rules above.

Second, we must not own, actually or constructively, 10% or more of the stock or the assets or net profits of any lessee, referred to as a related party tenant, other than a TRS. The constructive ownership rules generally provide that, if 10% or more in value of our shares is owned, directly or indirectly, by or for any person, we are considered as owning the stock owned, directly or indirectly, by or for such person. We do not own any stock or any assets or net profits of any lessee directly. In addition, our declaration of trust prohibits transfers of our shares that would cause us to own actually or constructively, 10% or more of the ownership interests in a lessee. We should, therefore, never own, actually or constructively, 10% or more of any lessee other than a TRS. We have represented to counsel that we will not rent any property to a related-party tenant. However, because the constructive ownership rules are broad and it is not possible to monitor continually direct and indirect transfers of our shares, no absolute assurance can be given that such transfers or other events of which we have no knowledge will not cause us to own constructively 10% or more of a lessee other than a TRS at some future date.

As described above, we may in the future own up to 100% of the stock of one or more TRSs. Under an exception to the related-party tenant rule described in the preceding paragraph, rent that we receive from a TRS will qualify as “rents from real property” as long as (1) at least 90% of the leased space in the property is leased to persons other than TRSs and related party tenants, and (2) the amount paid by the TRS to rent space at the property is substantially comparable to rents paid by other tenants of the property for comparable space. If in the future we receive rent from a TRS, we will seek to comply with this exception.

Third, the rent attributable to the personal property leased in connection with a lease of real property must not be greater than 15% of the total rent received under the lease. The rent attributable to personal property under a lease is the amount that bears the same ratio to total rent under the lease for the taxable year as the average of the fair market values of the leased personal property at the beginning and at the end of the taxable year bears to the average of the aggregate fair market values of both the real and personal property covered by the lease at the beginning and at the end of such taxable year (the “personal property ratio”). With respect to each of our leases, we believe that the personal property ratio generally is less than 15%. Where that is not, or may in the future not be, the case, we believe that any income attributable to personal property will not jeopardize our ability to qualify as a REIT. There can be no assurance, however, that the Internal Revenue Service would not challenge our calculation of a personal property ratio, or that a court would not uphold such assertion. If such a challenge were successfully asserted, we could fail to satisfy the 75% or 95% gross income test and thus lose our REIT status.

Fourth, we cannot furnish or render noncustomary services to the tenants of our properties, or manage or operate our properties, other than through an independent contractor who is adequately compensated and from whom we do not derive or receive any income. However, we need not provide services through an “independent contractor,” but instead may provide services directly to our tenants, if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not considered to be provided for the tenants’ convenience. In addition, we may provide a minimal amount of “noncustomary” services to the tenants of a property, other than through an independent contractor, as long as our income from the services does not exceed 1% of our income from the related property. Finally, we may own up to 100% of the stock of one or more TRSs, which may provide noncustomary services to our tenants without tainting our rents from the related properties. We do not intend to perform any services other than customary ones for our lessees, other than services provided through independent contractors or TRSs. We have represented to Morgan Lewis that we will not perform noncustomary services which would jeopardize our REIT status.

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If a portion of the rent we receive from a property does not qualify as “rents from real property” because the rent attributable to personal property exceeds 15% of the total rent for a taxable year, the portion of the rent attributable to personal property will not be qualifying income for purposes of either the 75% or 95% gross income test. If rent attributable to personal property, plus any other income that is nonqualifying income for purposes of the 95% gross income test, during a taxable year exceeds 5% of our gross income during the year, we would lose our REIT status. By contrast, in the following circumstances, none of the rent from a lease of property would qualify as “rents from real property”: (1) the rent is considered based on the income or profits of the lessee; (2) the lessee is a related party tenant or fails to qualify for the exception to the related-party tenant rule for qualifying TRSs; or (3) we furnish noncustomary services to the tenants of the property, or manage or operate the property, other than through a qualifying independent contractor or a TRS. In any of these circumstances, we could lose our REIT status because we would be unable to satisfy either the 75% or 95% gross income test.

Tenants may be required to pay, besides base rent, reimbursements for certain amounts we are obligated to pay to third parties (such as a lessee’s proportionate share of a property’s operational or capital expenses), penalties for nonpayment or late payment of rent or additions to rent. These and other similar payments should qualify as “rents from real property.” To the extent they do not, they should be treated as interest that qualifies for the 95% gross income test.

Interest.    The term “interest” generally does not include any amount received or accrued, directly or indirectly, if the determination of the amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term “interest” solely because it is based on a fixed percentage or percentages of receipts or sales. Furthermore, interest from the loan will be treated as gain from the sale of the secured property.

Prohibited Transactions.    A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets will be held primarily for sale to customers and that a sale of any of our assets will not be in the ordinary course of our business. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends, however, on the facts and circumstances in effect from time to time, including those related to a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction. We cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property that we hold “primarily for sale to customers in the ordinary course of a trade or business.” We may, however, form or acquire a TRS to hold and dispose of those properties we conclude may not fall within the safe-harbor provisions.

Foreclosure Property.    We will be subject to tax at the maximum corporate rate on any income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure property will qualify under the 75% and 95% gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incident to such real property acquired by a REIT as the result of the REIT’s having bid on the property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law after actual or imminent default on a lease of the property or on indebtedness secured by the property (any such proceeding or agreement referred to as a “Repossession Action”). Property acquired by a Repossession Action will not be considered “foreclosure property” if (a) the REIT held or acquired the property subject to a lease or securing indebtedness for sale to customers in the ordinary course of business or (b) the lease or loan was acquired or entered into with intent to take Repossession Action or in circumstances where the REIT had reason to know a default would occur. The determination of such intent or reason to know must be based on all relevant facts and circumstances. In no case will property be considered “foreclosure property” unless the REIT makes a proper election to treat the property as foreclosure property.

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A REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property (or longer if an extension is granted by the Secretary of the Treasury). This period (as extended, if applicable) terminates, and foreclosure property ceases to be foreclosure property on the first day:

• on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test;

• on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or

• which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income.

Hedging Transactions.    From time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase such items, and futures and forward contracts. Any periodic income or gain from the disposition of any financial instrument for these or similar transactions to hedge indebtedness we incur to acquire or carry “real estate assets” should be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. Since the financial markets continually introduce new and innovative instruments related to risk-sharing or trading, it is not entirely clear which such instruments will generate income which will be considered qualifying income for purposes of the gross income tests. We intend to structure any hedging or similar transactions so as not to jeopardize our status as a REIT.

Failure to Satisfy Gross Income Tests.    If we fail to satisfy one or both of the gross income tests for any taxable year, we nevertheless may qualify as a REIT for that year if we qualify for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if:

• our failure to meet these tests is due to reasonable cause and not to willful neglect;

• we attach a schedule of the sources of our income to our tax return; and

• any incorrect information on the schedule is not due to fraud with intent to evade tax.

We cannot with certainty predict whether any failure to meet these tests will qualify for the relief provisions. As discussed above in “Taxation of Our Company,” even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by a fraction intended to reflect our profitability.

Asset Tests.    To maintain our qualification as a REIT, we also must satisfy the following asset tests at the end of each quarter of each taxable year.

First, at least 75% of the value of our total assets must consist of:

• cash or cash items, including certain receivables;

• government securities;

• interests in real property, including leaseholds and options to acquire real property and leaseholds;

• interests in mortgages on real property;

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• stock in other REITs; and

• investments in stock or debt instruments during the one year period following our receipt of new capital that we raise through equity offerings or offerings of debt with at least a five year term.

Second, of our investments not included in the 75% asset class, the value of our interest in any one issuer’s securities may not exceed 5% of the value of our total assets.

Third, we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities.

Fourth, no more than 20% of the value of our total assets may consist of the securities of one or more TRSs.

Fifth, no more than 25% of the value of our total assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test.

For purposes of the second and third asset tests, the term “securities” does not include stock in another REIT, equity or debt securities of a qualified REIT subsidiary or TRS, mortgage loans that constitute real estate assets, or equity interests in a partnership. The term “securities,” however, generally includes debt securities issued by a partnership or another REIT, except that certain “straight debt” securities are not treated as “securities” for purposes of the 10% value test (for example, qualifying debt securities of a corporation if such securities are the only interests we or any TRS of ours owns, in that corporation or of a partnership if we own at least a 20% profits interest in the partnership).

We will monitor the status of our assets for purposes of the various asset tests and will manage our portfolio in order to comply at all times with such tests. If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT status if:

• we satisfied the asset tests at the end of the preceding calendar quarter; and

• the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets.

If we did not satisfy the condition described in the second item, above, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.

Distribution Requirements.    Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our shareholders in an aggregate amount not less than:

• the sum of

— 90% of our “REIT taxable income,” computed without regard to the dividends- paid deduction or our net capital gain or loss, and

— 90% of our after-tax net income, if any, from foreclosure property, minus

• the sum of certain items of non-cash income.

We must pay such distributions in the taxable year to which they relate, or in the following taxable year if we declare the distribution before we timely file our federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such declaration.

We will pay federal income tax on taxable income, including net capital gain, we do not distribute to shareholders. In addition, we will incur a 4% nondeductible excise tax on the excess of a specified required distribution over amounts we actually distribute if we distribute an amount less than the required distribution during a calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year. The required distribution must not be less than the sum of:

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• 85% of our REIT ordinary income for the year,

• 95% of our REIT capital gain income for the year, and

• any undistributed taxable income from prior periods.

We may elect to retain and pay income tax on the net long-term capital gain we receive in a taxable year. See “Federal Income Tax Consequences of Our Status as a REIT — Taxation of Taxable U.S. Shareholders.” If we so elect, we will be treated as having distributed any such retained amount for purposes of the 4% excise tax described above. We intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% excise tax.

It is possible that, from time to time, we may experience timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. For example, we may not deduct recognized capital losses from our “REIT taxable income.” Further, it is possible that, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds our allocable share of cash attributable to that sale. As a result of the foregoing, we may have less cash than is necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue additional common or preferred shares.

Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying “deficiency dividends” to our shareholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest based upon the amount of any deduction we take for deficiency dividends.

Recordkeeping Requirements.    We must maintain certain records in order to qualify as a REIT. In addition, to avoid paying a penalty, we must request on an annual basis information from our shareholders designed to disclose the actual ownership of the outstanding common shares. We have complied and intend to continue to comply with these requirements.

Failure to Qualify.    If we failed to qualify as a REIT in any taxable year and no relief provision applied, we would have the following consequences. We would be subject to federal income tax and any applicable alternative minimum tax at rates applicable to regular C corporations on our taxable income, determined without reduction for amounts distributed to shareholders. We would not be required to make any distributions to shareholders, and any distributions to shareholders would be taxable as ordinary income to the extent of our current and accumulated earnings and profits. Corporate shareholders could be eligible for a dividends-received deduction if certain conditions are satisfied. Unless we qualified for relief under specific statutory provisions, we would not be permitted to elect taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.

Taxation of Taxable U.S. Shareholders.    As long as we qualify as a REIT, a taxable “U.S. shareholder” will be required to take into account as ordinary income distributions made out of our current or accumulated earnings and profits that we do not designate as capital gain dividends or retained long-term capital gain. A U.S. shareholder will not qualify for the dividends-received deduction generally available to corporations. The term “U.S. shareholder” means a holder of Common Shares that, for United States federal income tax purposes, is:

• a citizen or resident of the United States;

• a corporation or partnership (including an entity treated as a corporation or partnership for U.S. federal income tax purposes) created or organized under the laws of the United States or of a political subdivision of the United States;

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• an estate whose income is subject to U.S. federal income taxation regardless of its source; or

• any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

Distributions to a U.S. shareholder which we designate as capital gain dividends will generally be treated as long-term capital gain, without regard to the period for which the U.S. shareholder has held its common shares. We generally will designate our capital gain dividends as either 20% or 25% rate distributions. A corporate U.S. shareholder, however, may be required to treat up to 20% of certain capital gain dividends as ordinary income.

We may elect to retain and pay income tax on the net long-term capital gain that we receive in a taxable year. In that case, a U.S. shareholder would be taxed on its proportionate share of our undistributed long-term capital gain. The U.S. shareholder would receive a credit or refund for its proportionate share of the tax we paid. The U.S. shareholder would increase the basis in its common shares by the amount of its proportionate share of our undistributed long-term capital gain, minus its share of the tax we paid.

A U.S. shareholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the distribution does not exceed the adjusted basis of the U.S. shareholder’s common shares. Instead, the distribution will reduce the adjusted basis of the shares, and any amount in excess of both our current and accumulated earnings and profits and the adjusted basis will be treated as capital gain, long-term if the shares have been held for more than one year, provided the shares are a capital asset in the hands of the U.S. shareholder. In addition, any distribution we declare in October, November, or December of any year that is payable to a U.S. shareholder of record on a specified date in any of those months will be treated as paid by us and received by the U.S. shareholder on December 31 of the year, provided we actually pay the distribution during January of the following calendar year.

Shareholders may not include in their individual income tax returns any of our net operating losses or capital losses. Instead, these losses are generally carried over by us for potential offset against our future income. Taxable distributions from us and gain from the disposition of common shares will not be treated as passive activity income; shareholders generally will not be able to apply any “passive activity losses,” such as losses from certain types of limited partnerships in which the shareholder is a limited partner, against such income. In addition, taxable distributions from us and gain from the disposition of common shares generally will be treated as investment income for purposes of the investment interest limitations. We will notify shareholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital, and capital gain.

Taxation of U.S. Shareholders on the Disposition of Common Shares.    In general, a U.S. shareholder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of our common shares as long-term capital gain or loss if the U.S. shareholder has held the shares for more than one year, and otherwise as short-term capital gain or loss. However, a U.S. shareholder must treat any loss upon a sale or exchange of common shares held for six months or less as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us which the U.S. shareholder treats as long-term capital gain. All or a portion of any loss that a U.S. shareholder realizes upon a taxable disposition of common shares may be disallowed if the U.S. shareholder purchases other common shares within 30 days before or after the disposition.

Capital Gains and Losses.    The tax-rate differential between capital gain and ordinary income for non-corporate taxpayers may be significant. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is presently 38.6% for the period from January 1, 2002 to December 31, 2003, 37.6% for the period from January 1, 2004 to December 31, 2005, and 35% for the period from January 1, 2006 to December 31, 2010. The maximum tax rate on long-term capital gain applicable to non-corporate taxpayers is

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20% for sales and exchanges of assets held for more than one year. The maximum tax rate on long-term capital gain from the sale or exchange of “section 1250 property” (i.e., generally, depreciable real property) is 25% to the extent the gain would have been treated as ordinary income if the property were “section 1245 property” (i.e., generally, depreciable personal property). We generally may designate whether a distribution we designate as capital gain dividends (and any retained capital gain that we are deemed to distribute) is taxable to non-corporate shareholders at a 20% or 25% rate.

The characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum of $3,000 annually. A non-corporate taxpayer may carry unused capital losses forward indefinitely. A corporate taxpayer must pay tax on its net capital gain at corporate ordinary-income rates. A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses carried back three years and forward five years.

Information Reporting Requirements and Backup Withholding.    We will report to our shareholders and to the Internal Revenue Service the amount of distributions we pay during each calendar year and the amount of tax we withhold, if any. A shareholder may be subject to backup withholding at a rate of up to 30% with respect to distributions unless the holder:

• is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or

• provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules.

A shareholder who does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding will be creditable against the shareholder’s income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to us. For a discussion of the backup withholding rules as applied to non-U.S. shareholders, see “Taxation of Non-U.S. Shareholders.”

Taxation of Tax-Exempt Shareholders.    Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, referred to as pension trusts, generally are exempt from federal income taxation. However, they are subject to taxation on their “unrelated business taxable income.” While many investments in real estate generate unrelated business taxable income, the Internal Revenue Service has issued a ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute unrelated business taxable income so long as the exempt employee pension trust does not otherwise use the shares of the REIT in an unrelated trade or business of the pension trust. Based on that ruling, amounts we distribute to tax-exempt shareholders generally should not constitute unrelated business taxable income. However, if a tax-exempt shareholder were to finance its acquisition of common shares with debt, a portion of the income it received from us would constitute unrelated business taxable income pursuant to the “debt-financed property” rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under special provisions of the federal income tax laws are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions they receive from us as unrelated business taxable income. Finally, in certain circumstances, a qualified employee pension or profit-sharing trust that owns more than 10% of our shares of beneficial interest must treat a percentage of the dividends it receives from us as unrelated business taxable income. The percentage is equal to the gross income we derive from an unrelated trade or business, determined as if we were a pension trust, divided by our total gross income for the year in which we pay the dividends. This rule applies to a pension trust holding more than 10% of our shares only if:

• the percentage of our dividends which the tax-exempt trust must treat as unrelated business taxable income is at least 5%;

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• we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our shares of beneficial interest be owned by five or fewer individuals, which modification allows the beneficiaries of the pension trust to be treated as holding shares in proportion to their actual interests in the pension trust; and

• either of the following applies:

— one pension trust owns more than 25% of the value of our shares of beneficial interest; or

— a group of pension trusts individually holding more than 10% of the value of our shares of beneficial interest collectively owns more than 50% of the value of our shares of beneficial interest.

Taxation of Non-U.S. Shareholders.    The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign shareholders are complex. This section is only a summary of such rules. We urge non-U.S. shareholders to consult their own tax advisors to determine the impact of federal, state, and local income tax laws on ownership of common shares, including any reporting requirements.

A non-U.S. shareholder that receives a distribution which (a) is not attributable to gain from our sale or exchange of “U.S. real property interests” (defined below) and (b) we do not designate a capital gain dividend (or retained capital gain) will recognize ordinary income to the extent of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. However, a non-U.S. shareholder generally will be subject to federal income tax at graduated rates on any distribution treated as effectively connected with the non-U.S. shareholder’s conduct of a U.S. trade or business, in the same manner as U.S. shareholders are taxed on distributions. A corporate non-U.S. shareholder may, in addition, be subject to the 30% branch profits tax. We plan to withhold U.S. income tax at the rate of 30% on the gross amount of any distribution paid to a non-U.S. shareholder unless:

• a lower treaty rate applies and the non-U.S. shareholder files an Internal Revenue Service, or IRS, Form W-8BEN evidencing eligibility for that reduced rate with us; or

• the non-U.S. shareholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.

A non-U.S. shareholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the excess portion of the distribution does not exceed the adjusted basis of the shareholder’s Common Shares. Instead, the excess portion of the distribution will reduce the adjusted basis of the shares. A non-U.S. shareholder will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of its shares, if the non-U.S. shareholder otherwise would be subject to tax on gain from the sale or disposition of Common Shares, as described below. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. shareholder may obtain a refund of amounts we withhold if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.

We must withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. We will, therefore, withhold at a rate of 10% on any portion of a distribution not subject to withholding at a rate of 30%.

For any year in which we qualify as a REIT, a non-U.S. shareholder will incur tax on distributions attributable to gain from our sale or exchange of “U.S. real property interests” under the “FIRPTA” provisions of

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the Internal Revenue Code. The term “U.S. real property interests” includes interests in real property and shares in corporations at least 50% of whose assets consist of interests in real property. Under the FIRPTA rules, a non-U.S. shareholder is taxed on distributions attributable to gain from sales of U.S. real property interests as if the gain were effectively connected with the conduct of a U.S. business of the non-U.S. shareholder. A non-U.S. shareholder thus would be taxed on such a distribution at the normal capital gain rates applicable to U.S. shareholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual. A non-U.S. corporate shareholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. We must withhold 35% of any distribution that we could designate as a capital gain dividend. A non-U.S. shareholder may receive a credit against our tax liability for the amount we withhold.

A non-U.S. shareholder generally will not incur tax under FIRPTA with respect to gain on a sale of common shares as long as, at all times, non-U.S. persons hold, directly or indirectly, less than 50% in value of the outstanding common shares. We cannot assure you that this test will be met. In addition, a non-U.S. shareholder that owned, actually or constructively, 5% or less of the outstanding common shares at all times during a specified testing period will not incur tax under FIRPTA on gain from a sale of common shares if the shares are “regularly traded” on an established securities market. Because the common shares will be regularly traded on an established securities market after this offering, a non-U.S. shareholder generally will not incur tax under FIRPTA on gain from a sale of common shares unless it owns more than 5% of the common shares. Any gain subject to tax under FIRPTA will be treated in the same manner as it would be in the hands of U.S. shareholders subject to alternative minimum tax, but under a special alternative minimum tax in the case of nonresident alien individuals and with the possible application of the 30% branch profits tax in the case of non-U.S. corporations.

A non-U.S. shareholder generally will incur tax on gain not subject to FIRPTA if:

• the gain is effectively connected with the conduct of the non-U.S. shareholder’s U.S. trade or business, in which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with respect to the gain; or

• the non-U.S. shareholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the non-U.S. shareholder will incur a 30% tax on capital gains.

Other Tax Consequences

Tax Aspects of Our Investments in the Operating Partnership.    The following discussion summarizes certain federal income tax considerations applicable to our direct or indirect investment in our operating partnership and any subsidiary partnerships or limited liability companies we form or acquire, each individually referred to as a Partnership and, collectively, as Partnerships. The following discussion does not cover state or local tax laws or any federal tax laws other than income tax laws.

Classification as Partnerships.    We are entitled to include in our income our distributive share of each Partnership’s income and to deduct our distributive share of each Partnership’s losses only if such Partnership is classified for federal income tax purposes as a partnership (or an entity that is disregarded for federal income tax purposes if the entity has only one owner or member), rather than as a corporation or an association taxable as a corporation. An organization with at least two owners or members will be classified as a partnership, rather than as a corporation, for federal income tax purposes if it:

• is treated as a partnership under the Treasury regulations relating to entity classification (the “check-the-box regulations”); and

• is not a “publicly traded” partnership.

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Under the check-the-box regulations, an unincorporated entity with at least two owners or members may elect to be classified either as an association taxable as a corporation or as a partnership. If such an entity does not make an election, it generally will be treated as a partnership for federal income tax purposes. We intend that each Partnership will be classified as a partnership for federal income tax purposes (or else a disregarded entity where there are not at least two separate beneficial owners).

A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or a substantial equivalent). A publicly traded partnership is generally treated as a corporation for federal income tax purposes, but will not be so treated for any taxable year for which at least 90% of the partnership’s gross income consists of specified passive income, including real property rents, gains from the sale or other disposition of real property, interest, and dividends (the “90% passive income exception”).

Treasury regulations, referred to as PTP regulations, provide limited safe harbors from treatment as a publicly traded partnership. Pursuant to one of those safe harbors, or private placement exclusion, interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (1) all interests in the partnership were issued in a transaction or transactions that were not required to be registered under the Securities Act of 1933, as amended, and (2) the partnership does not have more than 100 partners at any time during the partnership’s taxable year. For the determination of the number of partners in a partnership, a person owning an interest in a partnership, grantor trust, or S corporation that owns an interest in the partnership is treated as a partner in the partnership only if (1) substantially all of the value of the owner’s interest in the entity is attributable to the entity’s direct or indirect interest in the partnership and (2) a principal purpose of the use of the entity is to permit the partnership to satisfy the 100-partner limitation. Each Partnership should qualify for the private placement exclusion.

We have not requested, and do not intend to request, a ruling from the Internal Revenue Service that the Partnerships will be classified as partnerships for federal income tax purposes. If for any reason a Partnership were taxable as a corporation, rather than as a partnership, for federal income tax purposes, we likely would not be able to qualify as a REIT. See “Federal Income Tax Consequences of Our Status as a REIT—Requirements for Qualification—Income Tests” and “Federal Income Tax Consequences of Our Status as a REIT—Requirements for Qualification—Asset Tests.” In addition, any change in a Partnership’s status for tax purposes might be treated as a taxable event, in which case we might incur tax liability without any related cash distribution. See “Federal Income Tax Consequences of Our Status as a REIT—Requirements for Qualification—Distribution Requirements.” Further, items of income and deduction of such Partnership would not pass through to its partners, and its partners would be treated as shareholders for tax purposes. Consequently, such Partnership would be required to pay income tax at corporate rates on its net income, and distributions to its partners would constitute dividends that would not be deductible in computing such Partnership’s taxable income.

Income Taxation of the Partnerships and Their Partners

Partners, Not the Partnerships, Subject to Tax.    A partnership is not a taxable entity for federal income tax purposes. We will therefore take into account our allocable share of each Partnership’s income, gains, losses, deductions, and credits for each taxable year of the Partnership ending with or within our taxable year, even if we receive no distribution from the Partnership for that year or a distribution less than our share of taxable income. Similarly, even if we receive a distribution, it may not be taxable if the distribution does not exceed our adjusted tax basis in our interest in the Partnership.

Partnership Allocations.    Although a partnership agreement generally will determine the allocation of income and losses among partners, allocations will be disregarded for tax purposes if they do not comply with the provisions of the federal income tax laws governing partnership allocations. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners’ interests in the partnership, which will be determined by taking into account all of the facts and

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circumstances relating to the economic arrangement of the partners with respect to such item. Each Partnership’s allocations of taxable income, gain, and loss are intended to comply with the requirements of the federal income tax laws governing partnership allocations.

Tax Allocations With Respect to Contributed Properties.    Income, gain, loss, and deduction attributable to (a) appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership or (b) property revalued on the books of a partnership must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss, referred to as built-in gain or built-in loss, is generally equal to the difference between the fair market value of the contributed or revalued property at the time of contribution or revaluation and the adjusted tax basis of such property at that time, referred to as a book-tax difference. Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The U.S. Treasury Department has issued regulations requiring partnerships to use a “reasonable method” for allocating items with respect to which there is a book-tax difference and outlining several reasonable allocation methods. Our operating partnership has selected to use the traditional method for allocating items with respect to which there is a book-tax difference.

Basis in Partnership Interest.    Our adjusted tax basis in any partnership interest we own generally will be:

• the amount of cash and the basis of any other property we contribute to the partnership;

• increased by our allocable share of the partnership’s income (including tax-exempt income) and our allocable share of indebtedness of the partnership; and

• reduced, but not below zero, by our allocable share of the partnership’s loss, the amount of cash and the basis of property distributed to us, and constructive distributions resulting from a reduction in our share of indebtedness of the partnership.

Loss allocated to us in excess of our basis in a partnership interest will not be taken into account until we again have basis sufficient to absorb the loss. A reduction of our share of partnership indebtedness will be treated as a constructive cash distribution to us, and will reduce our adjusted tax basis. Distributions, including constructive distributions, in excess of the basis of our partnership interest will constitute taxable income to us. Such distributions and constructive distributions normally will be characterized as long-term capital gain.

Depreciation Deductions Available to Partnerships.    The initial tax basis of property is the amount of cash and the basis of property given as consideration for the property. A partnership in which we are a partner generally will depreciate property for federal income tax purposes under the modified accelerated cost recovery system of depreciation, referred to as MACRS. Under MACRS, the partnership generally will depreciate furnishings and equipment over a seven year recovery period using a 200% declining balance method and a half-year convention. If, however, the partnership places more than 40% of its furnishings and equipment in service during the last three months of a taxable year, a mid-quarter depreciation convention must be used for the furnishings and equipment placed in service during that year. Under MACRS, the partnership generally will depreciate buildings and improvements over a 39 year recovery period using a straight line method and a mid-month convention. The operating partnership’s initial basis in properties acquired in exchange for units of the operating partnership should be the same as the transferor’s basis in such properties on the date of acquisition by the partnership. Although the law is not entirely clear, the partnership generally will depreciate such property for federal income tax purposes over the same remaining useful lives and under the same methods used by the transferors. The partnership’s tax depreciation deductions will be allocated among the partners in accordance with their respective interests in the partnership, except to the extent that the partnership is required under the federal income tax laws governing partnership allocations to use a method for allocating tax depreciation deductions attributable to contributed or revalued properties that results in our receiving a disproportionate share of such deductions.

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Under recently enacted legislation, a first-year bonus depreciation of 30% may be available for certain tenant improvements.

Sale of a Partnership’s Property.    Generally, any gain realized by a Partnership on the sale of property held for more than one year will be long-term capital gain, except for any portion of the gain treated as depreciation or cost recovery recapture. Any gain or loss recognized by a Partnership on the disposition of contributed or revalued properties will be allocated first to the partners who contributed the properties or who were partners at the time of revaluation, to the extent of their built-in gain or loss on those properties for federal income tax purposes. The partners’ built-in gain or loss on contributed or revalued properties is the difference between the partners’ proportionate share of the book value of those properties and the partners’ tax basis allocable to those properties at the time of the contribution or revaluation. Any remaining gain or loss recognized by the Partnership on the disposition of contributed or revalued properties, and any gain or loss recognized by the Partnership on the disposition of other properties, will be allocated among the partners in accordance with their percentage interests in the Partnership.

Pursuant to the contribution agreement that we entered into in September 2002 with Nicholas Schorsch and several other individuals and entities relating to our acquisition of our initial properties and operating companies, we are required to pay these sellers a tax indemnity in the event of a taxable disposition of a property contributed by the these sellers prior to the earlier of (i) five years after the contribution of such property and (ii) the date on which these sellers no longer own in the aggregate at least 25% of the units of our operating partnership issued to these sellers at the time of their contribution of property to our operating partnership, referred to as the Expiration Date. The tax indemnity will equal the amount, if any, by which (i) the amount of the federal and state income tax liability (using an assumed combined federal and state income tax rate of 35%) incurred by these sellers with respect to the gain allocated to these sellers under Section 704(c) of the Internal Revenue Code exceeds (ii) the present value of such tax liability as of the end of the taxable year in which the disposition occurs, assuming such tax liability is not due until the end of the taxable year in which the Expiration Date is scheduled to occur. The discount rate to be used in the present value computation is 10% per annum.

Our share of any Partnership gain from the sale of inventory or other property held primarily for sale to customers in the ordinary course of the Partnership’s trade or business will be treated as income from a prohibited transaction subject to a 100% tax. Income from a prohibited transaction may have an adverse effect on our ability to satisfy the gross income tests for REIT status. See “Federal Income Tax Consequences of Our Status as a REIT — Requirements for Qualification — Income Tests.” We do not presently intend to acquire or hold, or to allow any Partnership to acquire or hold, any property that is likely to be treated as inventory or property held primarily for sale to customers in the ordinary course of our, or the Partnership’s, trade or business.

Taxable REIT Subsidiaries.    As described above, we may own up to 100% of the stock of one or more TRSs. A TRS is a fully taxable corporation that is permitted to have income that would not be qualifying income if earned directly by us. A TRS may provide services to our tenants and engage in activities unrelated to our tenants, such as third-party management, development, and other independent business activities.

We and any corporate subsidiary in which we own stock must make an election for the subsidiary to be treated as a TRS. If a TRS directly or indirectly owns shares of a corporation with more than 35% of the value or voting power of all outstanding shares of the corporation, the corporation will automatically also be treated as a TRS. Overall, no more than 20% of the value of our assets may consist of securities of one or more TRSs, and no more than 25% of the value of our assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test.

Rent we receive from our TRSs will qualify as “rents from real property” as long as at least 90% of the leased space in the property is leased to persons other than TRSs and related party tenants, and the amount paid by the TRS to rent space at the property is substantially comparable to rents paid by other tenants of the property

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for comparable space. The TRS rules limit the deductibility of interest paid or accrued by a TRS to us to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on transactions between a TRS and us or our tenants that are not conducted on an arm’s-length basis.

State and Local Taxes.    We and/or our shareholders may be subject to taxation by various states and localities, including those in which we or a shareholder transacts business, owns property or resides. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, shareholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the common shares.

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UNDERWRITING

We are offering our common shares of beneficial interest described in this prospectus through a number of underwriters. Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each of the underwriters has severally agreed to purchase from us, the number of common shares of beneficial interest listed next to its name in the following table:

Underwriter	Number of Shares
Banc of America Securities LLC
Friedman, Billings, Ramsey & Co., Inc.
UBS Warburg LLC
Wachovia Securities, Inc.
Total

The underwriting agreement is subject to a number of terms and conditions and provides that the underwriters must buy all of the shares if they buy any of them. The underwriters will sell the shares to the public when and if the underwriters buy the shares from us.

The underwriters will initially offer the shares to the public at the price specified on the cover page of this prospectus. The underwriters may allow to selected dealers a concession of not more than $             per share. The underwriters may also allow, and any dealers may reallow, a concession of not more than $             per share to selected other dealers. If all the shares are not sold at the public offering price, the underwriters may change the public offering price and the other selling terms. Our common shares are offered subject to a number of conditions, including:

• receipt and acceptance of our common shares by the underwriters; and

• the underwriters’ right to reject orders in whole or in part.

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.

We have granted the underwriters an option to purchase up to additional common shares of beneficial interest at the public offering price less the underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering any over-allotments made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional common shares approximately in proportion to the amounts specified in the table above.

The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

	No Exercise	Full Exercise
Per share	$
Total	$

We estimate that the total expenses of this offering to be paid by us, not including the underwriting discounts and commissions, will be approximately $             million.

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We, our trustees and executive officers, FBR Asset Investment Corporation, an affiliate of Friedman, Billing, Ramsey & Co., Inc., holders of units of our operating partnership and substantially all of our existing shareholders have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these securityholders may not, without the prior written approval of both Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc., as representatives of the underwriters, offer, sell, contract to sell or otherwise dispose of or hedge our common shares or securities convertible into or exchangeable for our common shares. These restrictions will be in effect for a period of 45 days after the date of this prospectus with respect to holders of units of our operating partnership (except that this period will be 180 days for Friedman, Billings, Ramsey & Co., Inc.) and holders of common shares issued in our private placement in September 2002, and 180 days after the date of this prospectus with respect to our trustees, executive officers and FBR Asset Investment Corporation under these lock-up agreements. At any time and without notice, Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc. may, in their joint discretion, release all or some of the securities from these lock-up agreements.

We will indemnify the underwriters against various liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to payments the underwriters may be required to make in respect of those liabilities.

We have applied to have our common shares listed on the New York Stock Exchange under the symbol “AFR.” In order to meet the requirements for listing on that exchange, the underwriters have undertaken to sell shares to a minimum of 2,000 beneficial owners in lots of 100 or more shares.

In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common shares, including:

• short sales;

• syndicate covering transactions;

• imposition of penalty bids; and

• purchases to cover positions created by short sales.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common shares while this offering is in progress. Stabilizing transactions may include making short sales of our common shares, which involves the sale by the underwriters of a greater number of common shares than they are required to purchase in this offering, and purchasing common shares from us or in the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount.

The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares pursuant to the over-allotment option.

A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common shares in the open market that could adversely affect investors who purchased in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The representatives also may impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters or selling group members that sold those shares as part of this offering to repay the selling concession received by them.

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As a result of these activities, the price of our common shares may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the New York Stock Exchange, in the over-the-counter market or otherwise.

The underwriters do not expect sales to accounts over which they exercise discretionary authority to exceed 5% of the total number of common shares of beneficial interest offered by this prospectus.

Prior to this offering, there has been no public market for our common shares. The initial public offering price will be determined by negotiations among us and the representatives of the underwriters. The primary factors to be considered in determining the initial public offering price include:

• the economic conditions in and future prospects for the industry in which we compete;

• our past and present operating performance and financial condition;

• our prospects for future earnings;

• an assessment of our management;

• the present state of our development;

• the prevailing conditions of the equity securities markets at the time of this offering; and

• current market valuations of publicly traded companies considered comparable to our company.

At our request, the underwriters have reserved up to 5% of the common shares being offered by this prospectus for sale to our trustees, employees, business associates and related persons at the public offering price. The sales will be made by                             through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. These persons must commit to purchase no later than the close of business on the day following the date of this prospectus. Any trustees, employees or other persons purchasing such reserved shares will be prohibited from disposing of or hedging such shares for a period of at least 180 days after the date of this prospectus.

Some of the underwriters in this offering and their affiliates have provided certain commercial banking, financial advisory and investment banking services to us and our affiliates for which they received customary fees. The underwriters and their affiliates may from time to time engage in future transactions with us and our affiliates and provide services to us and our affiliates in the ordinary course of their business.

J. Rock Tonkel, Jr., a member of our board of trustees, is an Executive Vice President and Head of Investment Banking at Friedman, Billings, Ramsey & Co., Inc. Please refer to the section in this prospectus entitled “Certain Relationships and Related Transactions” beginning on page 114 for a description of the contractual relationships we have with Friedman, Billings, Ramsey & Co., Inc. and its affiliates.

Immediately following our joint engagement on December 17, 2002 of Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc. to serve as co-lead, joint book-running managers of this offering, we entered into an engagement letter agreement with Banc of America Securities LLC pursuant to which Banc of America Securities LLC has the right for a specified term to participate in any future public or private capital raising transactions we undertake, other than traditional bank credit facilities and mortgage financings.

We have entered into agreements with Bank of America, N.A., an affiliate of Banc of America Securities LLC, and Wachovia Bank, N.A., an affiliate of Wachovia Securities, Inc., pursuant to which:

• we have purchased, or will purchase in the future, bank branches and office buildings; and

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• we have leased or will lease in the future space in our properties to these banks.

In addition, Bank of America, N.A. has provided us with debt financing in the past and has committed to provide us with a new bank credit facility. Affiliates of other members of our underwriting group may participate as lenders in the credit facility that Bank of America, N.A. has committed to provide to us.

We may enter into similar agreements in the future with members of our underwriting group or their affiliates. We believe that the agreements we have with certain of our underwriters and their affiliates have been entered into through arms-length negotiations and are on customary terms. Details regarding the terms of these agreements are set forth elsewhere in this prospectus under the headings, “Our Business and Properties—Our Properties”; “—Recent Developments and Completed Transactions” and “—Transactions in Process” on pp. 74-91.

LEGAL MATTERS

The validity of the common shares will be passed upon by Saul Ewing LLP, Baltimore, Maryland. The summary of legal matters contained in the section of this prospectus under the heading “Federal Income Tax Consequences of Our Status as a REIT” is based on the opinion of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering will be passed upon for the underwriters by Hunton & Williams.

EXPERTS

The consolidated balance sheet and related financial statement schedules of American Financial Realty Trust as of December 31, 2002 and the combined balance sheet of American Financial Real Estate Group, as of December 31, 2001, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for the period from September 10, 2002 (commencement of operation) to December 31, 2002, and the related combined statements of operations, owners’ net investment and cash flows for the period from January 1, 2002 to September 9, 2002 and for each of the years in the two year period ended December 31, 2001, have been included herein in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

The report of KPMG LLP indicates that, effective September 10, 2002, First States Group, L.P., the operating partnership of American Financial Realty Trust, acquired substantially all of the assets, liabilities, and operations of American Financial Real Estate Group in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-11, including exhibits and schedules filed with the registration statement of which this prospectus is a part, under the Securities Act with respect to the common shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to our company and the common shares to be sold in this offering, reference is made to the registration statement, including the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract is an exhibit to the registration statement, each statement is qualified in all

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respects by reference to the exhibit to which the reference relates. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, DC 20549. Information about the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0300. Copies of all or a portion of the registration statement can be obtained from the public reference room of the Securities and Exchange Commission upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you on the SEC’s Web site www.sec.gov.

As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act, and will file periodic reports, proxy statements and will make available to our shareholders annual reports containing audited financial information for each year and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.

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GLOSSARY

2003 Contractual Rent	Represents contractual rent due during the effective period under a lease for 2003, excluding reimbursements and operating expenses. For purposes of calculating 2003 contractual rent for properties under transactions in process, the effective period of leases for these properties begins on the first of the month after the anticipated closing for the property.
AFFO or adjusted funds from operations	AFFO is a computation made by analysts and investors to measure a real estate company’s cash available for distribution to shareholders. AFFO is generally calculated by subtracting from or adding to funds from operations (see FFO, below) (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s properties and its revenue stream (e.g., leasing commissions and tenant improvement allowances), (2) straightlining of rents and (3) amortization of defined costs.
AFREG	The term American Financial Real Estate Group includes operations of the following companies whose accounts comprise the financial statements of our predecessor entities: American Financial Resource Group, Inc., First States Management Corp., Strategic Alliance Realty LLC, First States Properties, L.P., First States Partners, L.P., Chester Court Realty, L.P., Dresher Court Realty, L.P., First States Partners II, L.P., First States Partners III, L.P. and First States Holdings, L.P.
AFRG	American Financial Resources Group, Inc., a Pennsylvania corporation.
Base year lease	In a base year lease, tenants are required to pay their pro-rata share of operating expenses in excess of the amount paid in the initial year of the lease.
Bond net lease	In a bond net lease, the tenant is typically responsible for real estate taxes, insurance, all repairs and maintenance and assumes the risk of condemnation and casualty.
Fannie Mae	Federal National Mortgage Association
FASB	The Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
FFO or funds from operations	FFO represents net income (loss) before minority interest in our operating partnership (computed in accordance with generally accepted accounting principles, or GAAP), excluding gains (or losses) from debt restructuring, including gains (or losses) on sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. FFO should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP.
Formation transactions	Formation transactions include the acquisition in September 2002 of our initial portfolio of 87 bank branches and six office buildings, AFRG and several other affiliated entities that now provide our properties with various management and financial services. We used the proceeds of our private placement of common shares in September 2002 to consummate these acquisitions.
Formulated price contract	Under a formulated price contract, we acquire or assume leasehold interests in the surplus bank branches of financial institutions at a pre-formulated price typically based on the fair market value of the property as determined through an independent appraisal process.
Freddie Mac	Federal Home Loan Mortgage Corporation
FS Partners II	First States Partners II, L.P.
FSW	First States Wilmington, L.P.

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GAAP	Generally accepted accounting principles, as defined by FASB.
Ginnie Mae	Government National Mortgage Association
Gross lease	In a gross lease, we are required to pay all operating expenses associated with a property, including any increases in expenses over the base year.
IRS	Internal Revenue Service
KEICP	Our Key Employee Incentive Compensation Plan
LIBOR	London Interbank Offered Rate
NAREIT	National Association of Real Estate Investment Trusts
Operating partnership	First States Group, L.P., a Delaware limited partnership.
REIT	Real estate investment trust
RMBS	Residential mortgage-backed securities.
SEC	United States Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended.
Securities Exchange Act	Securities Exchange Act of 1934, as amended.
Standard & Poor’s	Standard & Poor’s Corporation
Sale leaseback	Under this structure, we acquire a property and lease it back to the seller pursuant to a bond net lease or triple net lease, where rent is based largely upon the property’s purchase price and the tenant’s credit.
SERP	Our Supplemental Executive Retirement Plan
Specifically tailored transaction	These transactions, which typically relate to the acquisition of office building properties and often include a partial sale leaseback with the seller, apply more traditional leasing and pricing structures that we modify based on the seller’s specific needs.
Straightlining	Recognition of income or expense on a consistent basis throughout the term of the lease, regardless of when payments are actually due.
Triple net lease	In a triple net lease, the tenant is typically responsible for real estate taxes, insurance and all repairs and maintenance.
TRS or taxable REIT subsidiary	A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries” or TRS. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Furthermore, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis.

155

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

AMERICAN FINANCIAL REALTY TRUST	Page
Independent Auditors’ Report	F-2
Consolidated Balance Sheet, December 31, 2002 and Combined Balance Sheet, December 31, 2001	F-3
Consolidated Statement of Operations, period from September 10, 2002 (commencement of operations) to December 31, 2002, Combined Statements of Operations, period from January 1, 2002 to September 9, 2002, and years ended December 31, 2001 and 2000	F-4
Consolidated Statement of Shareholders’ Equity and Comprehensive Income (Loss), period from September 10, 2002 (commencement of operations) to December 31, 2002, and Combined Statements of Owners’ Net Investment, period from January 1, 2002 to September 9, 2002, and years ended December 31, 2001 and 2000	F-5
Consolidated Statement of Cash Flows, period from September 10, 2002 (commencement of operations) to December 31, 2002, and Combined Statements of Cash Flows, period from January 1, 2002 to September 9, 2002, and years ended December 31, 2001 and 2000	F-6
Notes to Consolidated and Combined Financial Statements	F-7
Schedule II—Valuation and Qualifying Accounts	F-27
Schedule III—Real Estate Investments	F-28
BANK OF AMERICA SMALL OFFICE PORTFOLIO—CLOSED
Report of Independent Auditors
Combined Statement of Revenues and Certain Expenses for the eleven months ended November 30, 2002	F-34
BANK OF AMERICA SPECIFICALLY TAILORED TRANSACTION—PENDING
Report of Independent Auditors
Combined Statement of Revenues and Certain Expenses for the year ended December 31, 2002	F-38

F-1

Independent Auditors’ Report

To the Shareholders and Board of Trustees

American Financial Realty Trust:

We have audited the accompanying consolidated balance sheet of American Financial Realty Trust and subsidiaries (Successor) as of December 31, 2002, and the combined balance sheet of American Financial Real Estate Group (Predecessor) as of December 31, 2001, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for the period from September 10, 2002 (commencement of operations) to December 31, 2002 (Successor period), and the related combined statements of operations, owners’ net investment and cash flows for the period from January 1, 2002 to September 9, 2002 and for each of the years in the two-year period ended December 31, 2001 (Predecessor periods). In connection with our audits of the consolidated and combined financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated and combined financial statements and financial statement schedules are the responsibility of the Companies’ management. Our responsibility is to express an opinion on these consolidated and combined financial statements and financial statement schedules based on our audits.

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

In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of American Financial Realty Trust and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the Successor period in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the aforementioned Predecessor combined financial statements present fairly, in all material respects, the financial position of American Financial Real Estate Group as of December 31, 2001, and the results of their operations and their cash flows for the Predecessor periods 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 or combined financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated and combined financial statements, effective September 10, 2002, First States Group, L.P., the operating partnership of American Financial Realty Trust, acquired substantially all of the assets, liabilities, and operations of American Financial Real Estate Group in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

/s/    KPMG LLP

Philadelphia, Pennsylvania

February 27, 2003

F-2

AMERICAN FINANCIAL REALTY TRUST

Consolidated and Combined Balance Sheets

December 31, 2002 and 2001

(In thousands)

				(Predecessor)
Assets	2002			2001
Real estate investments, at cost:
Land	$	30,079		$	19,795
Building and improvements		180,241			122,030
Equipment and fixtures		35,462			32,893
Leasehold interests		4,762			2,860
		250,544			177,578
Less accumulated depreciation		(15,217	)		(12,538	)
Real estate investments, net		235,327			165,040
Cash and cash equivalents		60,842			1,597
Restricted cash		14,010			6,515
Short-term investments		144,326			546
Available for sale residential mortgage-backed securities portfolio, pledged as collateral for reverse repurchase agreements (amortized cost of $1,114,727)		1,116,119			—
Accrued interest and principal due on mortgage-backed securities portfolio		19,070			—
Accounts receivable, net		643			310
Accrued rental income		4,003			4,740
Due from affiliates		22			651
Prepaid expenses and other assets		4,396			1,107
Notes receivable		693			—
Assets held for sale		1,757			744
Intangible assets, net of accumulated amortization of $90		2,413			—
Deferred costs, net of accumulated amortization of $333 and $557 in 2002 and 2001, respectively		1,544			2,510
Total assets	$	1,605,165		$	183,760
Liabilities and Shareholders’ Equity and Owners’ Net Investment
Mortgage notes payable	$	149,886		$	158,587
Line of credit borrowings		—			3,791
Other long-term debt		—			4,754
Reverse repurchase agreements		1,053,529			—
Total debt		1,203,415			167,132
Fair value of derivative instruments		6,192			—
Accounts payable		2,533			2,305
Accrued expenses and other liabilities		5,776			3,314
Dividends payable		10,330			—
Acquired lease liability, net of accumulated amortization of $68		1,268			—
Deferred revenue		1,870			1,319
Tenant security deposits		606			541
Total liabilities		1,231,990			174,611
Commitments and contingencies (notes 8 and 13)
Minority interest		36,513			—
Shareholders’ equity and owners’ net investment
Owners’ net investment		—			9,149
Preferred shares, 100,000,000 shares authorized at $.001 par value, no shares issued and outstanding at December 31, 2002		—			—
Common shares, 500,000,000 shares authorized at $.001 par value, 42,498,008 issued and outstanding at December 31, 2002		42			—
Capital contributed in excess of par		343,389			—
Deferred compensation		(1,885	)		—
Retained earnings (accumulated deficit)		(406	)		—
Accumulated other comprehensive loss		(4,478	)
Total shareholders’ equity and owners’ net investment		336,662			9,149
Total liabilities and shareholders’ equity and owners’ net investment	$	1,605,165		$	183,760

See accompanying notes to consolidated and combined financial statements.

F-3

AMERICAN FINANCIAL REALTY TRUST

Consolidated and Combined Statements of Operations

Period from September 10, 2002 (commencement of operations) to December 31, 2002, Period from

January 1, 2002 to September 9, 2002, and Years ended December 31, 2001 and 2000

(In thousands, except per share data)

				Predecessor
							Year ended December 31,
	Period from September 10, 2002 to December 31,			Period from January 1, 2002 to September 9,
	2002			2002			2001			2000
Revenues:
Rental income	$	8,338		$	17,314		$	25,815		$	13,483
Operating expense reimbursements		2,813			5,577			7,663			2,085
Interest income
Interest income		2,351			105			188			485
Interest income from residential mortgage-backed securities, net of expenses of $918		16,385			—			—			—
Other income		37			822			582			1,173
Total revenues		29,924			23,818			34,248			17,226
Expenses:
Property operating expenses		3,828			7,200			9,770			5,194
General and administrative expenses		3,645			4,695			8,212			7,185
Interest expense on reverse repurchase agreements		6,578			—			—			—
Interest expense on mortgages and other debt		3,421			9,737			14,071			6,042
Depreciation and amortization		2,911			5,849			8,468			3,082
Total expenses		20,383			27,481			40,521			21,503
Income (loss) before net gain on sales of properties, realized loss on sales of investments, income tax expense, minority interest and discontinued operations		9,541			(3,663	)		(6,273	)		(4,277	)
Net gain on sales of properties		846			—			4,107			8,934
Realized loss on sales of investments, net		(280	)		—			—			—
Income tax expense		(131	)		—			—			—
Income (loss) from continuing operations before minority interest		9,976			(3,663	)		(2,166	)		4,657
Minority interest		(849	)		—			—			—
Income (loss) from continuing operations		9,127			(3,663	)		(2,166	)		4,657
Discontinued operations:
Income (loss) from operations, net of minority interest of $22 from September 10, 2002 to December 31, 2002		(211	)		(180	)		(114	)		499
Gains on disposals, net of minority interest of $3 from September 10, 2002 to December 31, 2002		28			9,500			—			—
Income (loss) from discontinued operations		(183	)		9,320			(114	)		499
Net income (loss)	$	8,944		$	5,657		$	(2,280	)	$	5,156
Basic earnings per share:
From continuing operations	$	0.22
From discontinued operations		—
Total basic earnings per share	$	0.22
Diluted earnings per share
Diluted earnings per share from continuing operations	$	0.21
Loss per share from discontinued operations		—
Total diluted earnings per share	$	0.21

See accompanying notes to consolidated and combined financial statements.

F-4

AMERICAN FINANCIAL REALTY TRUST

Consolidated and Combined Statements of Shareholders’ Equity and Comprehensive Income (Loss) and Owners’ Net Investment

Period from September 10, 2002 (commencement of operations) to December 31, 2002, Period from

January 1, 2002 to September 9, 2002, and Years ended December 31, 2001 and 2000

(In thousands, except share data)

	Predecessor						American Financial Realty Trust
							Shares of Beneficial Interest	Common Shares at Par		Capital Contributed In excess of Par			Deferred Compensation			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)
	Owners’ Net Investment			Subscription Receivable																		Total
Balance, January 1, 2000	$	(2,234	)	$	(204	)	—	$	—	$	—		$	—		$	—		$	—		$	(2,438	)
Capital contributions and share issuances		20,888			—		—		—		—			—			—			—			20,888
Distributions		(9,915	)		—		—		—		—			—			—			—			(9,915	)
Advances to owner, net		(1,175	)		—		—		—		—			—			—			—			(1,175	)
Net income		5,156			—		—		—		—			—			—			—			5,156
Balance, December 31, 2000		12,720			(204	)	—		—		—			—			—			—			12,516
Capital contributions and share issuances		9,209			204		—		—		—			—			—			—			9,413
Distributions		(10,558	)		—		—		—		—			—			—			—			(10,558	)
Receipts from owner, net		58			—		—		—		—			—			—			—			58
Net loss		(2,280	)		—		—		—		—			—			—			—			(2,280	)
Balance, December 31, 2001		9,149			—		—		—		—			—			—			—			9,149
Capital contributions and share issuances		1,695			—		—		—		—			—			—			—			1,695
Distributions		(3,902	)		—		—		—		—			—			—			—			(3,902	)
Net income		5,657			—		—		—		—			—			—			—			5,657
Balance, September 9, 2002		12,599			—		—		—		—			—			—			—			12,599
Distribution of net assets not acquired		(1,015	)		—		—		—		—			—			—			—			(1,015	)
Transfer of historical equity		(11,584	)		—		—		—		11,584			—			—			—			—
Excess of fair value over net assets acquired from control group		—			—		—		—		(48,971	)		—			—			—			(48,971	)
Adjustment to establish minority interest in majority owned partnership		—			—		—		—		(1,449	)		—			—			—			(1,449	)
Adjustment for minority interest of unit holders in Operating Partnership		—			—		—		—		1,310			—			—			—			1,310
Issuance of common shares, net of expenses		—			—		42,288,008		42		378,815			—			—			—			378,857
Balance, September 10, 2002		—			—		42,288,008		42		341,289			—			—			—			341,331
Net income		—			—		—		—		—			—			8,944			—			8,944
Comprehensive income:
Unrealized loss on derivative financial instruments		—			—		—		—		—			—			—			(6,192	)		(6,192	)
Unrealized gain on available for sale securities		—			—		—		—		—			—			—			1,244			1,244
Minority interest allocation		—			—		—		—		—			—			—			470			470
Total comprehensive income		—			—		—		—		—			—			—			—			4,466
Dividends declared at $.22 per share		—			—		—		—		—			—			(9,350	)		—			(9,350	)
Issuance of restricted shares		—			—		210,000		—		2,100			(2,100	)		—			—			—
Amortization of deferred compensation		—			—		—		—		—			215			—			—			215
Balance, December 31, 2002	$	—		$	—		42,498,008	$	42	$	343,389		$	(1,885	)	$	(406	)	$	(4,478	)	$	336,662

See accompanying notes to consolidated and combined financial statements.

F-5

AMERICAN FINANCIAL REALTY TRUST

Consolidated and Combined Statements of Cash Flows

Period from September 10, 2002 (commencement of operations) to December 31, 2002, Period from

January 1, 2002 to September 9, 2002, and Years ended December 31, 2001 and 2000

(In thousands)

				Predecessor
	Period from September 10, 2002 to December 31, 2002			Period from January 1, 2002 to September 9, 2002			Year ended December 31,
							2001			2000
Cash flows from operating activities:
Net income (loss)	$	8,944		$	5,657		$	(2,280	)	$	5,156
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		2,629			5,831			8,671			3,243
Minority interest		830			—			—			—
Amortization of leasehold interests and intangible assets		308			190			141			122
Amortization of acquired leases to revenue		(36	)		—			—			—
Amortization of deferred financing costs		90			550			493			206
Amortization of deferred compensation and other share based compensation		437			—			—			—
Provision for doubtful accounts		—			89			360			—
Net gain on sales of properties		(877	)		(9,500	)		(3,907	)		(8,934	)
Realized loss on sale of investments		280			—			—			—
Premium amortization on residential mortgage-backed securities		995			—			—			—
Cash distributions to minority unitholders		(51	)		—			—			—
(Increase) decrease in operating assets:
Accounts receivable		(643	)		(400	)		(238	)		(37	)
Accrued rental income		(592	)		(1,068	)		(1,982	)		(1,577	)
Due from affiliates		(13	)		642			342			(38	)
Prepaid expenses and other assets		(2,543	)		(749	)		989			(1,468	)
Accrued interest income on residential mortgage-backed securities		(234	)		—			—			—
Increase (decrease) in operating liabilities:
Accounts payable		(201	)		882			998			1,201
Accrued expenses and other liabilities		3,716			(1,093	)		774			951
Accrued rent expense		44			113			162			116
Tenant security deposits		81			(16	)		—			419
Deferred revenue		(570	)		1,121			183			753
Due to affiliates		—			133			(119	)		(1	)
Net cash provided by operating activities		12,594			2,382			4,587			112
Cash flows from investing activities:
Purchases of residential mortgage-backed securities		(2,447,754	)		—			—			—
Sales of residential mortgage-backed securities		1,280,241			—			—			—
Receipt of principal payments on residential mortgage-backed securities		32,675			—			—			—
Cash paid for initial properties, net of cash acquired of $3,216		(30,944	)		—			—			—
Capital expenditures and leasehold acquisition costs		—			(1,228	)		(1,112	)		(680	)
Payments for acquisition of real estate investments		(63,233	)		(797	)		(24,126	)		(142,931	)
Proceeds from sales of real estate investments		4,456			14,674			22,921			21,871
Investments in equity method investee		—			(3,033	)		—			—
(Increase) decrease in restricted cash		(13,283	)		5,788			(2,896	)		(1,353	)
(Purchases) sales of short-term investments, net		(140,446	)		(2,991	)		(532	)		6,345
Net cash (used in) provided by investing activities		(1,378,288	)		12,413			(5,745	)		(116,748	)
Cash flows from financing activities:
Proceeds from reverse repurchase agreements, net		1,053,529			—			—			—
Proceeds from contributions and common share issuances		—			1,695			9,413			20,888
Distributions		—			(3,902	)		(10,558	)		(9,915	)
Repayments (advances to) from owner, net		—			—			58			(1,175	)
Proceeds from mortgage notes payable		—			10,372			10,142			117,882
Repayment of mortgage notes payable		(667	)		(20,934	)		(6,964	)		(7,910	)
Shares of beneficial interest issued, net of issuance costs		378,635			—			—			—
Proceeds from line of credit borrowings		—			30			104			396
Repayment of line of credit borrowings		(530	)		—			—			(400	)
Other long-term debt repayments, net		(4,431	)		(323	)		(339	)		(12	)
Payments for deferred financing costs		—			(114	)		(907	)		(1,633	)
Net cash provided by (used in) financing activities		1,426,536			(13,176	)		949			118,121
Increase (decrease) in cash and cash equivalents		60,842			1,619			(209	)		1,485
Cash and cash equivalents, beginning of period		—			1,597			1,806			321
Cash and cash equivalents, end of period	$	60,842		$	3,216		$	1,597		$	1,806
Supplemental cash flow information:
Cash paid for interest	$	3,792		$	8,181		$	14,100		$	5,800

See accompanying notes to consolidated and combined financial statements.

F-6

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(1)    Organization and Nature of Business

American Financial Realty Trust (AFR) is a newly organized, self-administered, and self-managed real estate investment trust (REIT). AFR was formed as a Maryland REIT on May 23, 2002 to acquire and operate properties leased primarily to regulated financial institutions. On September 10, 2002, AFR completed a private placement of common shares of beneficial interest and acquired from its predecessors entities and other related parties, 87 bank branches and six other buildings.

The Company’s interest in its properties is held through its operating partnership, First States Group, L.P. (the Operating Partnership). The Company is the sole general partner of the Operating Partnership. As of December 31, 2002, the Company holds a 90.51% interest in the Operating Partnership.

As more fully described in Note 3, the Operating Partnership acquired substantially all of the assets, liabilities, and operations of American Financial Real Estate Group (AFREG or the Predecessor). AFREG was comprised of certain operating companies and real estate limited partnerships under common control, as described in note 2(b). AFREG acquired corporate-owned real estate assets, primarily bank branches and office buildings from financial institutions, and owned and managed such assets under long-term, triple net leases. AFR and AFREG are herein after referred to as the Company. The Company operates in one segment, focusing on acquiring and operating properties leased to regulated financial institutions.

(2)     Summary of Significant Accounting Policies and Practices

(a)    Basis of Accounting

The accompanying consolidated and combined financial statements of the Company and AFREG, respectively, are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

(b)    Principles of Consolidation and Combination

The Company consolidates its accounts and the accounts of the majority-owned Operating Partnership and reflects the remaining interest in the Operating Partnership as minority interest. The Operating Partnership holds an 89% interest in a partnership which owns an office building. The remaining 11% partnership interest is reflected as minority interest.

The Predecessor financial statements of AFREG include the accounts of American Financial Resource Group, Inc. (AFRG), First States Management Corp., Strategic Alliance Realty LLC (SAR), First States Properties, L.P., First States Partners, L.P., Chester Court Realty, L.P., Dresher Court Realty, L.P., First States Partners II, L.P., First States Partners III, L.P., and First States Holdings, L.P. (Holdings).

All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated and combined financial statements.

(c)    Use of Estimates

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

F-7

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(d)    Real Estate Investments

The Company records acquired real estate at cost. Depreciation is computed using the straightline method over the estimated useful life of 40 years for buildings, 5 to 7 years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repairs expenditures are charged to expense as incurred.

If events or circumstances indicate that the carrying value of an operating property to be held and used may be impaired, management estimates the undiscounted future cash flows to be generated from the property, including any estimated proceeds from the disposition of the property. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to its estimated fair value and an impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount and capitalization rates.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The Statement does not change the fundamental provisions of SFAS No. 121; however, it resolves various implementation issues of SFAS No. 121 and establishes a single accounting model for long-lived assets to be disposed of by sale. It retains the requirement of Opinion No. 30 to report separately discontinued operations, and extends that reporting for all periods presented to a component of an entity that, subsequent to or on January 1, 2002, either has been disposed of or is classified as held for sale. Additionally, SFAS No. 144 requires that assets and liabilities of components held for sale, if material, be disclosed separately in the balance sheet. The Company adopted SFAS No. 144 effective January 1, 2002.

Properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell.

(e)    Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

(f)    Restricted Cash

Restricted cash includes amounts escrowed for insurance, taxes, repairs and maintenance, tenant improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to leasehold interests. At December 31, 2002, restricted cash includes $12,902 held in margin and custodial accounts related to the Company’s residential mortgage-backed securities and derivative financial instruments.

(g)    Short-term Investments

Short-term investments consist of shares in an institutional mutual fund that invests primarily in mortgage-backed securities. The Company has classified these investments as available-for-sale and recorded them at fair value. These short-term investments had a cost basis of $144,473. The unrealized loss of $147 at December 31, 2002 is excluded from earnings and reported as accumulated other comprehensive income (loss).

F-8

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(h)     Residential Mortgage-Backed Securities

Residential mortgage-backed security transactions are recorded on the date the securities are purchased or sold. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity

Securities,” the Company accounts for its residential mortgage-backed securities portfolio totaling $1,116,119 at December 31, 2002 as available for sale. Residential mortgage-backed securities classified as available-for-sale are reported at fair value, with unrealized gains and temporary unrealized losses excluded from earnings and reported as accumulated other comprehensive income (loss). Amortization of any premium or discount related to the purchase of securities is included as a component of interest income. Realized gains or losses on the sale of residential mortgage-backed securities are determined on the specific identification method and are included in net income as net gains or losses on sales of securities. Unrealized losses on residential mortgage-backed securities that are determined to be other than temporary are recognized in income. Management regularly reviews its investment portfolio for other than temporary market value decline. There were no such adjustments for residential mortgage-backed securities during the period ended December 31, 2002.

Income from investments in residential mortgage-backed securities is recognized using the effective interest method, using the expected yield over the life of the investment. Income includes contractual interest accrued and the amortization of any premium or discount recorded upon purchase. Changes in anticipated yields result primarily from changes in actual and projected cash flows and estimated prepayments. Changes in the yields that result from changes in the anticipated cash flows and prepayments are recognized over the remaining life of the investment with recognition of a cumulative catch-up at the date of change from the date of original investment.

The Company is exposed to the risk of credit losses on its residential mortgage-backed securities portfolio. The Company limits its exposure to credit losses on its portfolio of residential mortgage-backed securities by purchasing securities issued and guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae. The payments of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by those respective agencies and the payment of principal and interest on the Ginnie Mae mortgage-backed securities is backed by the full-faith-and-credit of the U.S. Government. The financing of the residential mortgage-backed securities through repurchase agreements exposes the Company to the risk that margin calls for additional collateral will be made if the market value of the securities declines and that the Company may not be able to meet those margin calls which could result in the Company selling the residential mortgage-backed securities at a loss to cover these margin calls.

(i)    Accounts Receivable

The Company provides for doubtful accounts based on a review of delinquent accounts receivable. Bad debt expense was $0, $89, $360 and $0 for the period from September 10, 2002 to December 31, 2002, the period from January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000, respectively, for amounts that were deemed to be uncollectible. As of December 31, 2002 and 2001, no individual tenant represents greater than 10% of accounts receivable.

(j)    Prepaid Expenses and Other Assets

The Company makes payments for certain expenses for insurance and property taxes in advance of the period in which they receive the benefit. These payments are capitalized, classified as prepaid expenses and amortized over the respective period of benefit relating to the contractual arrangement. As of December 31, 2002, the Company has included in prepaid expenses and other assets approximately $2,983 relating to deposits made to a title company for pending acquisitions.

F-9

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(k)    Notes Receivable

The Company holds notes receivable from unrelated parties related to properties sold by AFREG during 2002. These notes receivable have maturity dates ranging from July 2003 to May 2007 and bear interest at annual rates ranging from 9% to 10%.

(l)    Intangible Assets

The purchase method of accounting for real estate acquisitions requires the fair value of in place leases at the time of acquisition be recorded as an intangible asset or liability separated into various components. The origination value intangible asset represents the fair value associated with acquiring in place leases. The acquired lease value results from future cash flows under the contractual lease terms that are either above or below market at the date of acquisition. Accordingly, as of December 31, 2002 the Company recorded an intangible asset related to the origination value of acquired leases of $943, an acquired lease asset of $860 for above market leases, and an acquired lease liability of $1,336 for below market leases. Amortization expense recorded during the period from September 10, 2002 through December 31, 2002 for the origination value of acquired leases totaled $58. The amortization of acquired leases resulted in a net increase in rental income of $36 during the period from September 10, 2002 through December 31, 2002. Management of the Company reviews the carrying value of intangible assets for impairment on an annual basis.

As of December 31, 2002, intangible assets and acquired lease liabilities consist of the following:

Intangible assets:
Acquired lease asset, net of accumulated amortization of $32	$  828
Origination value, net of accumulated amortization of $58	885
Other	700
Total intangible assets	$2,413
Acquired lease liability, net of accumulated amortization of $68	$1,268

(m)    Deferred Costs

The Company has deferred certain expenditures related to the financing and leasing of certain properties. Deferred financing costs are amortized to interest expense using the straightline method over the terms of the related debt. Direct costs of leasing are deferred and amortized over the terms of the related leases.

(n)    Accounting for Derivative Financial Investments and Hedging Activities

The Company accounts for its derivative and hedging activities using SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires all derivative instruments to be carried at fair value on the balance sheet.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as

F-10

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

its risk-management objective and strategy for undertaking each hedge transaction. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Amounts are reclassified from other comprehensive income to the income statements in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS 133. The Company is not party to any derivatives designated as fair value hedges.

Under cash flow hedges, derivative gains and losses not considered highly effective in hedging the change in expected cash flows of the hedged item are recognized immediately in the income statement. The Company uses Eurodollar futures contracts in cash flow hedge transactions. The Eurodollar futures contracts are designed to be highly effective in offsetting changes in the cash flows related to the hedged liability. For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.

(o)    Owners’ Net Investment

The accompanying combined financial statements of AFREG include the total of shareholders’ equity for the subchapter S-corporations, members’ equity for limited liability corporations, and partners’ equity for the limited partnerships. The combined owners’ net investment balance is increased for capital contributions made by the owners, and any net income of AFREG and is reduced for distributions made to the owners and any net losses of AFREG.

The various partnership and operating agreements of the entities comprising AFREG contain provisions for the allocation of profits, losses, and proceeds from capital transactions. Such amounts are generally allocated in accordance with the owners’ respective percentage interests.

(p)    Comprehensive Income

Comprehensive income or loss is recorded in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive Income”. SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Our comprehensive income (loss), is comprised of net income, changes in unrealized gains or losses on derivative financial instruments and unrealized gains or losses on available-for-sale securities.

(q)    Revenue Recognition

Rental income from leases is recognized on a straightline basis regardless of when payments are due. Accrued rental income in the accompanying consolidated and combined balance sheets represents rental income recognized in excess of payments currently due. For the period from September 10, 2002 to December 31, 2002, the period from January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000, rental revenues recognized in excess of payments due were $592, $1,068, $1,982 and $1,577, respectively. Certain lease agreements also contain provisions that require tenants to reimburse the Company for real estate taxes and common area maintenance costs. Deferred revenue represents rental revenue received from tenants prior to their due dates.

F-11

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

AFREG performed various accounting, property management, leasing, and project management services for related entities (Note 9). AFREG recognized revenue for accounting and management services when the service was provided and earned in accordance with the related agreements. Revenue related to the acquisition or disposition of properties was recognized when the related transaction closes. All such revenue was recorded in other income in the accompanying consolidated and combined statements of operations.

(r)    Rent Expense

Rent expense is recognized on a straightline basis regardless of when payments are due. Accrued expenses and other liabilities in the accompanying consolidated and combined balance sheets include an accrual for rental expense recognized in excess of amounts currently due. For the period from September 10, 2002 to December 31, 2002, the period from January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000, rent expense recognized in excess of payments due was $44, $113, $162 and $116, respectively.

(s)    Income Taxes

The Company has elected to qualify as a REIT under Sections 856-860 of the Internal Revenue Code and intends to remain so qualified.

Earnings and profits, which determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to differences in cost basis, differences in the estimated useful lives used to compute depreciation, and differences between the allocation of the Company’s net income and loss for financial reporting purposes and for tax reporting purposes.

The Company has a wholly-owned Taxable REIT Subsidiary (TRS) as defined under the Internal Revenue Code. The asset and liability approach is used by the TRS to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established to reduce net deferred tax assets to the amount for which recovery is more likely than not. The Company has recorded an income tax provision in the accompanying consolidated statement of operations of $131 for the period from September 10, 2002 through December 31, 2002 based on the taxable income of the TRS. The TRS’s effective tax rate is approximately 40%, including the effects of state taxes. The TRS does not have deferred tax assets or liabilities as of December 31, 2002.

The aggregate cost basis, net of depreciation, for federal income tax purposes of the Company’s investment in real estate was approximately $217 million at December 31, 2002.

For the period from September 10, 2002 through December 31, 2002, all of the Company’s dividends were characterized as ordinary income for federal income tax purposes.

All of the entities of AFREG included in the Predecessor combined financial statements are limited partnerships, registered subchapter S-corporations, or limited liability companies that are treated as partnerships for income tax purposes. As a result, no federal or state income taxes are payable by AFREG and, accordingly, no provision for income taxes has been recorded in the Predecessor financial statements. The partners, members, or subchapter S-shareholders are required to include their respective shares of AFREG’s profits or losses in their individual tax returns. The tax returns of AFREG and the amount of reported profits or losses are subject to examination by federal and state taxing authorities. If such examinations result in changes to such profits or losses, the tax liability of the respective partners, members, or shareholders would be changed.

F-12

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(t)    Equity-Based Compensation

At December 31, 2002, the Company has a stock-based employee compensation plan, which is more fully described in Note 11. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying common shares on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to share-based employee compensation. The Company recognizes compensation cost related to restricted share awards on a straightline basis over the respective vesting periods.

	Period from September 10, 2002 to December 31, 2002
Net income	$	8,944
Add: Total share-based employee compensation expense included in net income		437
Deduct: Total share-based employee compensation expense determined under fair value based methods for all awards		(484	)
Pro forma net income	$	8,897
Basic earnings per share—as reported	$	0.22
Basic earnings per share—pro forma		0.22
Diluted earnings per share—as reported		0.21
Diluted earnings per share—pro forma		0.21

(u)    Earnings Per Share

Basic earnings per share (EPS) is based on the weighted average number of shares outstanding during the year. Diluted EPS is based on the weighted average number of shares outstanding during the year, adjusted to give effect to common share equivalents.

(v)    Fair Value Disclosures

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash, restricted cash, accounts receivable, accounts payable and reverse repurchase agreements.     For these short-term instruments, the carrying amounts approximate their fair values.

Investment securities available for sale.    Fair values for residential mortgage-backed securities are based on market prices, where available, provided by independent brokers. The fair values reported reflect estimates and may not necessarily be indicative of the amounts the Company could realize in a current market transaction. The fair value of short-term investments are based on quoted market prices as of the balance sheet date. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” securities classified as available-for-sale are reported at fair value, with unrealized gains and temporary unrealized losses excluded from earnings and reported as accumulated other comprehensive income (loss).

F-13

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

Long-term debt.    Fair value is estimated by discounting cash flows using period-end interest rates and market conditions for instruments with similar maturities and credit quality. As of December 31, 2002 and 2001, the fair value of the Company’s debt exceeded its carrying value by approximately $12,300 and $6,600, respectively.

(w)    Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees; including Guarantees of Indebtedness of Others.” This interpretation requires that a liability must be recognized at the inception of a guarantee issued or modified after December 31, 2002 whether or not payment under the guarantee is probable. For guarantees entered into prior to December 31, 2002, the interpretation requires certain information related to the guarantees be disclosed in the guarantor’s financial statements. The disclosure requirements of this interpretation are effective for fiscal years ending after December 15, 2002. As of December 31, 2002, the Company has not guaranteed any indebtedness of others.

On January 17, 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, requiring variable interest entities to be consolidated in the financial statements of the holder of the variable interest. The interpretation is effective immediately for all variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. As of December 31, 2002, the Company does not have any unconsolidated variable interest entities.

(x)    Reclassifications

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

(3)    Acquisitions and Divestitures

On September 10, 2002, the Operating Partnership acquired substantially all of the assets, liabilities and operations of AFREG (Formation Transaction) in a business combination accounted for as a purchase. The total purchase price consisted of approximately $34 million in cash, the issuance of 1,204,940 of common shares and of 3,705,378 operating partnership units, valued at $10.00 per share/unit, and the assumption of debt with a carrying value of approximately $146 million.

The Formation Transaction was accounted for under Staff Accounting Bulletin Topic 5g(SAB48) with carryover basis for the portion of the net assets acquired from the majority shareholder/general partner and his affiliates and fair value for the remaining portion of the net assets acquired from all other investments. The fair values were determined by management using valuation techniques customary in the real estate industry for such investments. The following table represents the allocation of the purchase price for the Formation Transactions to the assets acquired and liabilities assumed:

Real estate investments	$	180,520
Other assets		14,450
Mortgage notes payable and other long-term debt		(155,514	)
Other liabilities		(8,512	)
Cash paid, net of cash acquired of $3,216	$	30,944

F-14

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

The following table presents information regarding the property acquisitions completed since the Formation Transaction:

Seller	Property Type	Acquisition Structure	Closing Date	Number of Buildings	Purchase Price
KeyBank	Bank branches	Formulated Price	Sept. 27, 2002	2	$	455
Bank of America	Bank branches	Formulated Price	Oct. 24, 2002	5		2,702
Wachovia Bank	Bank branches	Formulated Price	Dec. 10, 2002	26		24,598
Bank of America	Small office	Specifically Tailored	Dec. 16, 2002	16		32,786
AmSouth	Bank branches	Formulated Price	Dec. 20, 2002	11		2,692
Total 2002 transactions				60	$	63,233
Dana Commercial Credit	Large office	Sale Leaseback	Jan. 10, 2003	14	$	339,279
Wachovia Bank	Bank branches	Formulated Price	Feb. 5, 2003	5		2,810
AmSouth	Bank branches	Formulated Price	Feb. 12, 2003	1		260
Total 2003 Transactions				20	$	342,349

From September 10, 2002 through December 31, 2002, the Company sold five bank branch properties for net sales proceeds of $4,456. The sales transactions resulted in a net gain, after taxes of approximately $817.

From January 1, 2002 through September 9, 2002, AFREG sold 22 bank branch properties for net sales proceeds of $14,674 in addition to notes receivables from the purchasers of $9,500. The sales transactions resulted in a net gain of approximately $9,500.

During 2001, AFREG acquired fee interests in 58 bank branch properties and leasehold interests in another 13 bank branch properties for total consideration of approximately $24,126, and sold 45 bank branch properties for net proceeds of approximately $22,921. The sales transactions resulted in a net gain of approximately $4,107.

During 2000, AFREG acquired five bank branch properties and three office properties for total consideration of approximately $142,931 and sold 33 bank branch properties for net proceeds of approximately $21,871. The sales transactions resulted in a net gain of approximately $8,934.

The purchase price for the acquisitions was allocated to the individual properties and leasehold interests based on the relative fair values.

The unaudited pro forma information relating to the Formation Transactions and the acquisition of operating properties from Bank of America are presented below as if these transaction had been consummated on January 1, 2002. These results are not necessarily indicative of the results which actually would have occurred if they would have occurred on January 1, 2002, nor does the pro forma financial information purport to represent the results of operations for future periods.

F-15

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

Pro forma revenue	$	59,339
Pro forma income from continuing operations		5,450
Pro forma income from discontinued operations		9,137
Pro forma net income		14,587
Basic pro forma earnings per share:
From continuing operations	$	0.13
From discontinued operations		0.22
Basic pro forma net income per share	$	0.35
Diluted pro forma earnings per share:
From continuing operations	$	0.13
From discontinued operations		0.18
Diluted pro forma net income per share	$	0.31

(4)    Residential Mortgage-Backed Securities

After September 10, 2002, the Company invested approximately $75,000 of the total proceeds from a private placement offering (See Note 1) with FBR Investment Management, Inc. for investment in a portfolio of adjustable-rate residential mortgage-backed securities. Residential mortgage-backed securities (which are also known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family mortgages; the principal and interest payments are passed from the mortgage originators through intermediaries (generally U.S. Government agencies and U.S. Government sponsored enterprises) that pool and repackage the participation interests in the form of securities to investors such as the Company. The Company’s investment in the residential mortgage-backed securities portfolio is financed by entering into reverse repurchase agreements to leverage the overall return on capital invested in the portfolio. At December 31, 2002, the Company held residential mortgage-backed securities with amortized cost and market values of $1,114,727 and $1,116,119, respectively. These securities were pledged as collateral with respect to reverse repurchase agreements of $1,053,529.

The following table summarizes the Company’s residential mortgage-backed securities as of December 31, 2002:

	Freddie Mac			Fannie Mae			Total
Mortgage-backed securities available for sale, face	$	619,333		$	466,670		$	1,086,003
Unamortized net premium		15,737			12,987			28,724
Amortized cost		635,070			479,657			1,114,727
Gross unrealized gains		1,567			699			2,266
Gross unrealized losses		(176	)		(698	)		(874	)
Fair value	$	636,461		$	479,658		$	1,116,119

F-16

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

The following table summarizes the estimated maturities of mortgaged-backed securities based on their estimated average lives as of December 31, 2002:

Due within one year	$	18,061
Due after 1 within 5 years		86,809
Due after 5 within 10 years		129,668
Due after 10 years		880,189
Total amortized costs	$	1,114,727

During the period from September 10, 2002 through December 31, 2002, the Company received proceeds of approximately $1.3 billion from the sale of residential mortgage-backed securities. The Company recorded a net realized loss of approximately $280 related to these sales. For the period September 10, 2002 through December 31, 2002, the weighted average coupon rate on mortgage-backed securities was 4.41% and the weighted average effective yield was 4.40%. The weighted average life of the residential mortgage-backed securities based on assumptions used to determine fair value was 1.7 years at December 31, 2002.

(5)    Reverse Repurchase Agreements

The Company has entered into short-term repurchase agreements to finance a significant portion of its residential mortgage-backed securities. The repurchase agreements are secured by certain of the Company’s residential mortgage-backed securities classified as pledged as collateral on the Company’s consolidated balance sheet and bear interest at rates that have historically related closely to LIBOR for a corresponding period.

At December 31, 2002, the Company had obligations totaling $1,053,529 under reverse repurchase agreements with a weighted average borrowing rate of 1.37%. At December 31, 2002, the reverse repurchase agreements had remaining maturities of between 5 and 15 days. At December 31, 2002, residential mortgage-backed securities pledged had an estimated fair value of approximately $1,116,119. At December 31, 2002, the Company had a current overall loan-to-value (reverse repurchase agreements divided by pledged residential mortgage-backed securities) of 94.3%. For the period from September 10, 2002 through December 31, 2002, the weighted average borrowing rate was approximately 1.62% and the weighted average reverse repurchase agreement balance was approximately $1.5 billion.

The Company uses Eurodollar futures contracts to hedge cash flows associated with expected borrowings under reverse repurchase agreements. At December 31, 2002, the Company had Eurodollar futures contracts with a notional amount of $555 million which were designated as hedges of future interest payments associated with the reverse repurchase debt during the period from June 2003 through September 2004. At December 31, 2002, the futures contracts were reported at their fair value as a liability of $6,192.

Interest rate hedges are designated as cash flow hedges of future cash outflows associated with floating rate borrowings. The unrealized gains and losses in the fair value of these hedges are reported in the consolidated balance sheet with a corresponding adjustment to either accumulated other comprehensive income or net income depending on the type of hedging relationship. If the hedging transaction is a cash flow hedge, the gains and losses are reported in accumulated other comprehensive income (loss). Over time, the unrealized gains or losses recorded in accumulated other comprehensive income (loss) will be charged to earnings. This treatment matches the amounts recorded when the hedged items are also recognized in earnings. Within the next 12 months, the Company expects to record a charge to earnings of approximately $2.9 million of the current balance in accumulated other comprehensive loss.

F-17

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(6)    Indebtedness

(a)    Mortgage Notes Payable

The Company financed the purchase of certain of its real estate investments with the proceeds from mortgage notes payable. The following is a summary of mortgage notes payable:

	December 31,
	2002		2001
Mortgage notes payable, secured by an office building divided into two condominium units; monthly payments of principal and interest with effective fixed interest rates ranging from 7.57% to 7.79% through the anticipated maturity dates of October 2010 for Unit I and October 2007 for Unit II; after the anticipated maturity dates, 2% or 5% will be added to the interest rate if the loans remain outstanding:
Unit I, including unamortized debt premium of $1,481 at December 31, 2002	$	37,495	$	36,274
Unit II, including unamortized debt premium of $1,940 at December 31, 2002		54,192		52,630
Mortgage notes payable, secured by 38 bank branches and 4 office properties; monthly payments of principal and interest at effective fixed interest rates ranging from 6.08% to 7.54%; maturing from 2007 through 2027, including unamortized debt premium of $1,245 at December 31, 2002		58,199		69,683
Total mortgage notes payable	$	149,886	$	158,587

For the period from September 10, 2002 to December 31, 2002, for the period from January 1, 2002 to December 31, 2002 and for years ended December 31, 2001 and 2000, the mortgage notes payable had weighted average effective interest rates of 7.6%, 8.0%, 8.3% and 7.8%, respectively.

Certain of the mortgage notes payable contain financial and nonfinancial covenants customarily found in mortgage notes of this type, as well as a requirement that certain individual properties maintain a debt service coverage ratio, as defined, of 1.10 to 1, calculated at the end of each quarter using a trailing 12-month period. As of December 31, 2002 and 2001, the Company was in compliance with all such covenants.

Principal payments due on the mortgage notes payable and other long-term debt as of December 31, 2002 are as follows:

2003	$	2,295
2004		2,471
2005		2,661
2006		2,866
2007		57,140
2008 and thereafter		82,453
Total	$	149,886

F-18

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(b)    Lines of Credit

AFREG utilized a $500,000 unsecured line of credit for working capital purposes. Interest was payable monthly at a rate of Prime minus 1% (Prime was 9.5%, and 8.5% as of December 31, 2001, and 2000, respectively). The outstanding balance at December 31, 2001 represents the largest balance outstanding on this line of credit during that period. AFREG’s weighted average interest rate on the line of credit for the years ended December 31, 2001 and 2000 was 6.3%, and 8.0%, respectively. During September 2002, all outstanding amounts under the line of credit were repaid and the line of credit was canceled by AFREG.

AFREG entered into a revolving loan agreement in May 2001 secured by 18 bank branches owned by Holdings. Monthly payments of interest only were due at various rates ranging from 11% to 35%. As of December 31, 2001, the total amount outstanding was approximately $3,291. All remaining borrowings were paid in full in May 2002 and the revolving loan agreement was cancelled by AFREG.

(c)    Other Long-Term Debt

As of December 31, 2001, other long-term debt consisted of various borrowings (interest rates of 7.9% to 8.9%) with final maturity dates extending through 2011. During September 2002, all amounts outstanding under these borrowings were repaid or distributed, along with the related assets, to the former partners and shareholder of AFREG upon commencement of operations of the Company on September 10, 2002.

(7)    Shareholders’ Equity

On September 10, 2002, the Company issued a total of 42,498,008 common shares of beneficial interest, including 40,765,241 common shares issued pursuant to a private placement (Private Placement) of common shares in accordance with Rule 144A under the Securities Act, 1,522,767 common shares issued to the Company’s President, Chief Executive Officer and Vice Chairman of the board of trustees, and certain of his family members and 210,000 restricted shares issued to the Company’s independent trustees. The Company received net proceeds of approximately $378,635 after $29,464 of offering expenses including the initial purchaser’s discount. The net proceeds were used to pay the cash portion of the Formation Transaction.

A total of 317,827 shares purchased by the Company’s President and certain of his family members were purchased at an amount equal to the offering price, net of the initial purchaser’s discount. The net difference of $222 was charged to expense.

Concurrent with the closing of the Private Placement, the Company purchased the majority of the operations of AFREG in the Formation Transaction (as more fully discussed in Note 3). As a result of the Formation Transaction, the Company recognized a reduction in overall equity of $48,971 which represents the fair value of net assets acquired from the majority shareholder/general partner and his affiliates in excess of their historical carrying amounts.

F-19

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(8)    Leasing Agreements

The Company’s properties are leased and subleased to tenants under operating leases with expiration dates extending to the year 2024. Future minimum rentals under noncancelable leases excluding reimbursements for operating expenses as of December 31, 2002 are as follows:

2003	$	28,447
2004		27,460
2005		25,881
2006		25,654
2007		25,393
2008 and thereafter		161,914
Total	$	294,749

Rental income from Wachovia Bank, or its affiliates, represented 43%, 44%, 43% and 22% of total minimum rental income for the period from September 10, 2002 to December 31, 2002, the period from January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000, respectively. Rental income from Sovereign Bank, or its affiliates, and from Deutsche Bank represented 13% and 11% respectively, of total minimum rental income for the year ended December 31, 2000. No other tenant represented more than 10% of minimum rental income for any of the periods presented.

As of December 31, 2002, the Company leased 36 bank branch properties from third parties with expiration dates extending to the year 2036. In addition, the Company has two ground leases with expiration dates extending through 2086. Future minimum lease payments under non-cancelable operating leases as of December 31, 2002 are as follows:

2003	$	1,803
2004		1,587
2005		1,454
2006		1,398
2007		1,390
2008 and thereafter		9,452
Total	$	17,084

(9)    Transactions with Related Parties

The Company provides management and other services to entities affiliated with the chief executive officer. Total revenue received by the Company from these affiliated entities was approximately $47, $752, $429 and $463 for the period from September 10, 2002 to December 31, 2002, the period from January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000, respectively. Such amounts are included in other income in the accompanying consolidated and combined statements of operations. The Company currently provides property and asset management services for three bank branches and a five-story office building, all of which are owned by certain executive officers and trustees and other entities affiliated with them. The Company has an option to acquire the office building property. During the period from January 1, 2002 to September 9, 2002, the Company sold two bank branches to affiliates of the chief executive officer for an aggregate price of $3.0 million. A net gain of $2.2 million was recognized on the sale of these properties.

F-20

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

As of December 31, 2002 and 2001, accounts receivable included approximately $137 and $114, respectively, for amounts due from related parties. As of December 31, 2002 and 2001, accounts payable included approximately $64 and $0, respectively, for amounts due to related parties.

AFREG paid certain expenses on behalf of related parties totalling approximately $5, $222, and $518 during the period from January 1, 2002 through September 10, 2002 and for the years ended December 31, 2001, and 2000, respectively. In addition, the Company leases space in two office buildings from real estate partnerships controlled by related parties. Total rent payments under these office leases were approximately $91, $56, $67 and $46 for the period from September 10, 2002 to December 31, 2002, the period from January 1, 2002 to September 9, 2002, and the years ended December 31, 2001 and 2000, respectively. One lease expires in July 2009 and has aggregate annual rent of $66 of the other lease has an aggregate annual rent of $46, and expires in 2008. Both leases are subject to annual rent increases of the greater of 3% or the Consumer Price Index. All of these amounts are included in general and administrative expenses in the accompanying consolidated and combined statements of operations.

Certain other related parties historically provided various services to AFREG. During 2002, 2001, and 2000, payments totaling approximately $0, $169, and $101, respectively, were made for design and consulting services. These related party services are included in general and administrative expense in the accompanying combined statements of operations.

An officer of the Company owns a one-third interest in a leasing company that provides leasing services with respect to certain properties. Leasing commissions charged to expense related to these services were approximately $67, $175, $288 and $272, for the period from September 10, 2002 through December 31, 2002, the period from January 1, 2002 through September 9, 2002 and for the years ended December 31, 2001 and 2000, respectively.

AFREG periodically advanced funds to related entities to support the operations of the related entities during the Predecessor periods. These advances were typically provided during the initial operations. These advances were repaid to AFREG from operations of the related entity or upon its sale. At December 31, 2002 and 2001, amounts due from affiliates related to these advances were $22 and $651, respectively.

A member of the Company’s Board of Trustees is Head of Investment Banking at Friedman Billings Ramsey (FBR). FBR served as placement agent in connection with the Company’s September 2002 private placement of common shares. The Company and FBR entered into an Intellectual Property Contribution and Unit Purchase Agreement as of May 24, 2002 pursuant to which FBR contributed certain intellectual property and other in-kind capital in exchange for the issuance of 750,000 Operating Partnership units. FBR Investment Management, an affiliate of FBR, is entitled to receive investment advisory fees based on the month-end balance invested in the residential mortgage-backed securities investment account. Total fees paid for such services during the period from September 10, 2002 through December 31, 2002 were $768. Under the terms of an engagement letter, FBR will provide customary investment banking and financial advisory services for a one-year period following the completion of an initial public offering.

(10)    Discontinued Operations and Assets Held for Sale.

In accordance with the provisions of SFAS No. 144, the Company has classified four bank branch properties as of December 31, 2002. Operating results of the properties held for sale as of December 31, 2002, one property sold during the period from September 10, 2002 through December 31, 2002 and 22 properties sold during the period from January 1, 2002 through September 9, 2002 are included in discontinued operations for all periods presented.

F-21

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

As of December 31, 2001, certain properties were held for sale under the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”

The operating results of the properties held for sale as of December 31, 2001 are included in continuing operations in all periods presented.

	December 31,
	2002			2001
Assets held for sale:
Real estate investments, at cost:
Land	$	293		$	145
Building		1,234			430
Equipment and fixtures		296			192
		1,823			767
Less accumulated depreciation		(66	)		(23	)
Total assets held for sale	$	1,757		$	744

				Predecessor
	Period from September 10, 2002 to December 31, 2002			Period from January 1, 2002 to September 9, 2002
							Year ended December 31,
							2001			2000
Operating Results:
Revenues	$	—		$	454		$	1,187		$	1,459
Operating expenses		207			209			524			208
Interest expense		—			253			574			591
Depreciation		26			172			203			161
(Loss) income from operations before minority interest		(233	)		(180	)		(114	)		499
Minority interest		22			—			—			—
(Loss) income from operations, net		(211	)		(180	)		(114	)		499
Gain (loss) on disposals		31			9,500			—			—
Minority interest		(3	)		—			—			—
Gain on disposals, net		28			9,500			—			—
(Loss) income from discontinued operations	$	(183	)	$	9,320		$	(114	)	$	499

For the period from September 10, 2002 to December 31, 2002, and for the year ended December 31, 2001, operating expenses include an impairment loss of $97 and $200, respectively, for properties under contract with sales prices less than the related asset’s carrying value.

Discontinued operations have not been segregated in the consolidated and combined statements of cash flows. Therefore, amounts for certain captions will not agree will the respective consolidated and combined statements of operations.

F-22

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(11)    2002 Equity Incentive Plan

The Company has established a 2002 Equity Incentive Plan (Incentive Plan) that authorizes the issuance of up to 3,125,000 options to purchase common shares and 1,500,000 restricted share awards. The terms and conditions of the option awards are determined by the Board of Trustees. Options are granted at the fair market value of the shares on the date of grant. The options vest and are exercisable over periods determined by the Company, but in no event later than 10 years from the grant date. As of December 31, 2002, the Company has 312,375 options to purchase common shares and 1,290,000 restricted share awards available for grant under the Incentive Plan. Of the remaining 1,290,000 restricted share awards that are available for award under the Incentive Plan, the compensation and human resources committee of the board of trustees has approved awards to the Company’s senior management team of 1,141,000 restricted shares, effective upon completion of the Company’s initial public offering.

The following table summarizes option activity for the period from September 10, 2002 to December 31, 2002 for the Company:

	Number of Shares under the Plan	Weighted Average Exercise Price		Aggregate Purchase Price		Grant Price Range
						From		To
Balance, September 10, 2002	—	$	—	$	—	$	—	$	—
Options granted	2,812,625		10.06		28,306		10.00		11.65
Balance, December 31, 2002	2,812,625	$	10.06	$	28,306	$	10.00	$	11.65

As of December 31, 2002, there are no exercisable options. The weighted average remaining contractual life is 9.7 years.

The Company accounts for stock-based compensation using the intrinsic value method in Accounting Principles Board Opinion No. 25 as permitted under SFAS No. 123, Accounting for Stock-Based Compensation. The weighted-average fair value of each option granted during the period from September 10, 2002 to December 31, 2002 was $0.20 and was estimated on the grant date using the Black-Scholes options pricing model and the assumptions presented below:

Expected life (in years)	5
Risk-free interest rate	4.05	%
Volatility	10.00	%
Dividend yield	7.50	%

Upon completion of the September 2002 private placement of common shares, 210,000 restricted shares were issued to independent trustees at a value of $10.00 per share. Restricted shares vest ratably over a three year period. Compensation expense of $215 was recorded during the period during September 10, 2002 through December 31, 2002 relating to those awards.

The Company has established a non-qualified supplemental executive retirement plan (SERP). The benefit payable under the SERP is based on a specified percentage of each participant’s average annual compensation for the three calendar years out of the last 10 calendar years of employment that produces the highest average amount, subject to an annual maximum benefit. As of December 31, 2002, the Company’s CEO is the only participant in the SERP. Compensation expense related to the SERP was $92 for the period from September 10, 2002 through December 31, 2002.

F-23

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

(12)    Earnings Per Share (EPS)

The following is a reconciliation of the numerator and denominators of the basic and diluted EPS computations for the period for September 10, 2002 to December 31, 2002 only, as no common shares were issued by AFREG prior to September 10, 2002:

	Period from September 10, 2002 to December 31, 2002
	Basic			Diluted
Income from continuing operations		$9,127			$9,127
Add: Minority interest in Operating Partnership		—			957
Income from continuing operations	$	9,127		$	10,084
(Loss) from discontinued operations	$	(183	)	$	(183	)
Add: Minority interest in Operating Partnership		—			19
Income from discontinued operations	$	(183	)	$	(164	)
Weighted average number of common shares outstanding		42,168,109			42,168,109
Effect of share options issued		—			313,470
Dilutive operating partnership units		—			4,455,966
Total weighted average shares outstanding		42,168,109			46,937,545
Earnings per share from continuing operations		$  0.22			$  0.21
Earnings per share from discontinued operations		$   —			$   —

Diluted earnings per share includes common share equivalents which would arise from the exercise of share options using the treasury stock method and assumes the conversion of all Operating Partnership units into an equivalent number of common shares. No securities for the period from September 10, 2002 to December 31, 2002 were excluded from the earnings per share computations above as all common share equivalents had a dilutive effect on earnings per share from continuing operations.

(13)    Commitments and Contingencies

Under agreements with certain financial institutions, the Company is obligated to purchase properties or assume leasehold interests at a formulated price based on appraised values. Current agreements are renewable on an annual basis, and may be terminated upon 90 days prior written notice in the case of two of the agreements, and 30 days prior written notice in the case of the other agreement. The purchase of these properties or assumption of the leasehold interests is done on an “as-is” basis; however, the Company is not required to acquire properties with certain environmental or structural problems or with defects in title that render the property either unmarketable or uninsurable at regular rates or that materially reduce the value of the property or materially impair or restrict its contemplated use. If the Company subsequently discovers issues or problems related to the physical condition of a property, zoning, compliance with ordinances and regulations, or other significant problems, the Company typically has no recourse against the seller and the value of the property may be less than the amount paid for such property. Should the Company default on its purchase obligation, the Company would forfeit its initial deposit and any supplemental deposits made with the financial institution. In addition, the Company would be liable for any rental payments due under the leasehold interests. At December 31, 2002 and 2001, total deposits of $440 and $250, respectively, were held with financial institutions and included in prepaid expenses and other assets in the accompanying consolidated and combined balance sheets. These deposits will be returned to the Company at the expiration date of the respective agreements.

F-24

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share data)

Pursuant to the formulated price contracts described above and other structured transactions, the Company has signed agreements or letters-of-intent to acquire approximately $544.0 million of real estate properties, subject to execution of agreements, standard due diligence, and customary closing procedures.

The Company may be subject to claims or litigation in the ordinary course of business. When identified, these matters are usually referred to the Company’s legal counsel or insurance carriers. In the opinion of management, at December 31, 2002, there are no outstanding claims against the Company that would have a material adverse effect on the Company’s financial position or results of operations.

(14)    Subsequent Events

Dana Commercial Credit Corporation

On January 9, 2003, the Company acquired a portfolio of 14 office buildings from a wholly owned subsidiary of Dana Commercial Credit Corporation for an aggregate purchase price of approximately $339.3 million, consisting of cash and the fair value of assumed debt. The properties are located in the District of Columbia, Georgia, Florida, Maryland, North Carolina, South Carolina and Virginia, and are 100% bond-net leased to Bank of America, N.A.

As part of the purchase price for these properties, the Company repaid debt of approximately $256.0 million in full, together with a make-whole payment of an additional $40.0 million. This transaction was completed with $200.0 million of borrowings under a bridge loan facility with Bank of America, N.A. and approximately $139.3 million in cash.

All the properties in this portfolio are leased to Bank of America pursuant to a master lease through 2022. Over the life of the lease, Bank of America is permitted to vacate space totaling 50.0% of the value of the portfolio based on the original purchase price paid by Dana Commercial Credit Corporation, according to the following schedule: 17.0% in 2004; 17.0% in 2009; and 16.0% in 2015. The annual rental payments under the lease are fixed at approximately $40.4 million through January 2011, regardless of the number of rentable square feet leased by Bank of America. If Bank of America does not vacate space as contemplated under the lease, it will pay an annual rent rate of 8.5% of the original purchase price allocated to that space on a triple net lease basis. Other than with respect to space that Bank of America leases from the Company according to this formula, from 2011 through 2022, Bank of America is not required to pay rent on the space that it continues to occupy. The Company is restricted from selling any property in the portfolio while Bank of America remains a tenant in that building.

Bank of America Specifically Tailored Transaction

On February 14, 2003, the Company entered into an agreement with Bank of America, N.A. to acquire a portfolio of 124 office buildings for an aggregate purchase price of approximately $749.0 million. The parties are currently negotiating a lease agreement for the portfolio. The Company will have a due diligence period of 75 days, beginning upon execution of the lease agreement, to examine the properties. Prior to closing, Bank of America has the right, during the due diligence period, to reduce the size of the portfolio by up to 20% of the total purchase price, and the further ability, subject to the Company’s approval and to other terms and conditions, to add properties to the portfolio or to substitute for any property covered by the agreement another property owned by Bank of America, provided that the new property is of substantially the same value and character as the property being removed from the portfolio. The aggregate purchase price for the properties will be adjusted to account for any addition, reduction or substitution of properties in the portfolio.

F-25

AMERICAN FINANCIAL REALTY TRUST

Notes to Consolidated and Combined Financial Statements—(Continued)

December 31, 2002 and 2001

(Dollars in thousands, except share and per share amounts)

Upon consummating the transaction, Bank of America will lease all or a portion of each of the acquired properties from the Company under a lease term of 20 to 29½ years at a rate based on a formula to be set forth in the purchase agreement. Subject to the terms and conditions of the purchase agreement, Bank of America will be entitled to increase its occupancy of any of the properties, to reduce periodically its occupancy of the acquired properties based on a to be agreed upon schedule, and to vacate space in any property for space at another location within this portfolio. Bank of America will also have certain rights of first refusal and first offer on the acquired properties. Subject to satisfactory completion of due diligence, management of the Company anticipates closing this acquisition in stages beginning in the second quarter of 2003, and the Company is required to close on all of the properties in the portfolio no later than October 2003. Upon completion of the transaction, Bank of America will initially lease an aggregate of approximately 65% of the rentable square feet in this portfolio.

Upon consummating the transaction, the Company will be restricted from selling any property in the portfolio, without Bank of America’s consent, while Bank of America remains a tenant in that building.

F-26

COMPANY NAME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

American Financial Realty Trust

Schedule II

Valuation of Qualifying Accounts

(in thousands)

Description	Balance at Beginning of Period		Additions Charged to Expense		Deductions		Balance at End of Period
Allowance for doubtful accounts:
Period from September 10, 2002 to December 31, 2002	$	25	$	—	$	—	$	25

American Financial Real Estate Group

Schedule II

Valuation of Qualifying Accounts

(in thousands)

Description	Balance at Beginning of Period		Additions Charged to Expense		Deductions			Balance at End of Period
Allowance for doubtful accounts:
Period from January 1, 2002 to September 9, 2002	$	—	$	89	$	(64	)	$	25
Year ended December 31, 2001	$	—	$	360	$	(360	)	$	—
Year ended December 31, 2000	$	—	$	—	$	—		$	—

F-27

AMERICAN FINANCIAL REALTY TRUST

SCHEDULE III

City	State	Acquisition Date	Encumbrances at December 31, 2002		Initial Costs				Net Improvements (Retirements) Since Acquisition		Gross Amount at Which Carried December 31, 2002
					Land		Building and Improvements				Land		Building and Improvements		Total		Accumulated Depreciation 12/31/02		Depreciable Life
Abington	PA	8/19/1998	$	849	$	82	$	520	$	—	$	82	$	520	$	602	$	46	27
Red Bank	NJ	8/20/1998		1,255		141		859		—		141		859		1,000		51	27
Avondale	PA	8/20/1998		627		99		542		—		99		542		641		48	27
Lopatcong	NJ	8/20/1998		454		63		317		—		63		317		380		30	27
Moorestown	NJ	8/20/1998		—		51		249		—		51		249		300		24	27
Berkeley Heights	NJ	8/20/1998		627		84		405		—		84		405		489		35	27
Cherry Hill	NJ	8/20/1998		642		72		354		—		72		354		426		26	27
Campbelltown	PA	8/20/1998		216		40		196		—		40		196		236		19	27
Edison Township	NJ	8/20/1998		773		104		499		—		104		499		603		41	27
Emmaus	PA	8/20/1998		740		111		521		—		111		521		632		41	27
Feasterville	PA	8/20/1998		1,156		125		601		—		125		601		726		24	27
Freehold	NJ	8/20/1998		590		66		322		—		66		322		388		26	27
Gloucester	NJ	8/20/1998		463		52		260		—		52		260		312		21	27
Hamilton Square	NJ	8/20/1998		734		113		519		—		113		519		632		47	27
Highland Park	NJ	8/20/1998		551		67		353		—		67		353		420		24	27
Hightstown	NJ	8/20/1998		756		78		381		—		78		381		459		24	27
Kendall Park	NJ	8/20/1998		716		64		304		—		64		304		368		14	27
Kenilworth	NJ	8/20/1998		514		60		285		—		60		285		345		18	27
Kennett Square	PA	8/20/1998		1,402		174		779		—		174		779		953		26	27
Lawrenceville	NJ	8/20/1998		975		113		548		—		113		548		661		39	27
Linden	NJ	8/20/1998		1,193		147		651		—		147		651		798		31	27
Manasquan	NJ	8/20/1998		826		83		399		—		83		399		482		22	27
Millburn	NJ	8/20/1998		1,046		127		604		—		127		604		731		43	27
Moosic	PA	8/20/1998		340		36		158		—		36		158		194		9	27
North End	PA	8/20/1998		211		32		146		—		32		146		178		8	27
N. Plainfield	NJ	8/20/1998		—		26		130		—		26		130		156		13	27
Phoenixville	PA	8/20/1998		1,133		133		589		—		133		589		722		19	27
Point Pleasant	NJ	8/20/1998		603		78		394		—		78		394		472		25	27
Runnemede	NJ	8/20/1998		—		20		113		—		20		113		133		18	27
Scotch Plains	NJ	8/20/1998		810		86		405		—		86		405		491		24	27
Somerdale	NJ	8/20/1998		326		49		233		—		49		233		282		14	27
South Plainfield	NJ	8/20/1998		669		80		377		—		80		377		457		26	27
Spring Lake Heights	NJ	8/20/1998		460		56		319		—		56		319		375		20	27
Sunnyside	NJ	8/20/1998		1,156		135		606		—		135		606		741		26	27
Ventnor City	NJ	8/20/1998		499		55		274		—		55		274		329		21	27
Warminster	PA	8/20/1998		840		111		561		—		111		561		672		33	27
West Chester	PA	1/28/1999		3,697		396		3,545		—		396		3,545		3,941		482	27
Dresher	PA	6/17/1999		941		353		957		—		353		957		1,310		168	27
Collingswood	NJ	8/6/1999		401		52		281		—		52		281		333		30	27
Pennington	NJ	8/6/1999		735		92		567		—		92		567		659		58	27
Rhawnhurst	PA	8/6/1999		877		70		349		—		70		349		419		21	27
Boyertown	PA	12/14/1999		380		57		309		—		57		309		366		31	27
Jenkintown	PA	7/11/2000		16,106		2,429		20,424		—		2,429		20,424		22,853		1,756	27
Bensalem	PA	9/20/2000		693		76		424		—		76		424		500		28	27
Philadelphia	PA	9/26/2000		91,638		12,763		108,884		—		12,763		108,884		121,647		9,844	27
Charleston	SC	12/29/2000		10,266		1,425		12,015		—		1,425		12,015		13,440		1,102	27

F-28

AMERICAN FINANCIAL REALTY TRUST

SCHEDULE III

City	State	Acquisition Date	Encumbrances at December 31, 2002	Initial Costs		Net Improvements (Retirements) Since Acquisition	Gross Amount at Which Carried December 31, 2002
				Land	Building and Improvements		Land	Building and Improvements	Total	Accumulated Depreciation 12/31/02	Depreciable Life
Neuse Blvd	NC	5/9/2001	—	43	231	—	43	231	274	9	27
Newberry	SC	5/9/2001	—	—	—	—	—	—	—	—	27
Juno Beach	FL	5/9/2001	—	—	182	—	—	182	182	6	27
Grape Creek	TX	6/8/2001	—	42	211	—	42	211	253	6	27
Derby Main	KS	9/21/2001	—	130	698	—	130	698	828	24	27
Shallotte	NC	9/21/2001	—	88	470	—	88	470	558	16	27
SW Little Rock	AR	12/11/2001	—	28	140	—	28	140	168	3	27
Aurora Main	MO	2/28/2002	—	74	397	—	74	397	471	7	27
Baseline	AR	2/28/2002	—	34	182	—	34	182	216	4	27
Woodmoor	MD	10/20/2001	—	43	217	—	43	217	260	6	27
Central Kingston	NY	9/27/2002	—	51	289	—	51	289	340	3	27
Johnstown	NY	9/27/2002	—	17	98	—	17	98	115	1	27
Dalton	GA	12/10/2002	—	143	813	—	143	813	956	2	27
Archdale	NC	12/10/2002	—	51	291	—	51	291	342	1	27
Charlotte	NC	12/10/2002	—	214	1,212	—	214	1,212	1,426	3	27
Cary	NC	12/10/2002	—	185	1,051	—	185	1,051	1,236	3	27
Wilson	NC	12/10/2002	—	116	657	—	116	657	773	2	27
Rocky Mount	NC	12/10/2002	—	101	574	—	101	574	675	1	27
Hickory	NC	12/10/2002	—	197	1,119	—	197	1,119	1,316	3	27
Hickory	NC	12/10/2002	—	102	578	—	102	578	680	1	27
Lexington	NC	12/10/2002	—	196	1,110	—	196	1,110	1,306	3	27
Cornelius	NC	12/10/2002	—	187	1,061	—	187	1,061	1,248	3	27
Albemarle	NC	12/10/2002	—	172	974	—	172	974	1,146	2	27
Huntersville	NC	12/10/2002	—	158	893	—	158	893	1,051	2	27
Southern Pines	NC	12/10/2002	—	92	523	—	92	523	615	1	27
Statesville	NC	12/10/2002	—	183	1,040	—	183	1,040	1,223	3	27
Raleigh	NC	12/10/2002	—	170	961	—	170	961	1,131	2	27
Charlotte	NC	12/10/2002	—	97	548	—	97	548	645	1	27
Clover	SC	12/10/2002	—	74	417	—	74	417	491	1	27
Hilton Head	SC	12/10/2002	—	252	1,430	—	252	1,430	1,682	4	27
Hilton Head	SC	12/10/2002	—	311	1,760	—	311	1,760	2,071	4	27
Florence	SC	12/10/2002	—	109	617	—	109	617	726	2	27
Greenwood	SC	12/10/2002	—	131	742	—	131	742	873	2	27
Greenwood	SC	12/10/2002	—	37	210	—	37	210	247	1	27
Greenville	SC	12/10/2002	—	97	549	—	97	549	646	1	27
Harrisonburg	VA	12/10/2002	—	71	405	—	71	405	476	1	27
Richmond	VA	12/10/2002	—	171	970	—	171	970	1,141	2	27
Portsmouth	VA	12/10/2002	—	71	405	—	71	405	476	1	27
Altamonte Springs	FL	12/16/2002	—	436	2,473	—	436	2,473	2,909	5	27
Fort Myers	FL	12/16/2002	—	225	1,278	—	225	1,278	1,503	3	27
Dodge City	KS	12/16/2002	—	65	459	—	65	459	524	1	27
Tampa	FL	12/16/2002	—	151	857	—	151	857	1,008	2	27
Spring Hill	FL	12/16/2002	—	166	917	—	166	917	1,083	2	27
West Plains	MO	12/16/2002	—	161	912	—	161	912	1,073	2	27

F-29

AMERICAN FINANCIAL REALTY TRUST

SCHEDULE III

City	State	Acquisition Date	Encumbrances at December 31, 2002		Initial Costs				Net Improvements (Retirements) Since Acquisition		Gross Amount at Which Carried December 31, 2002
					Land		Building and Improvements				Land		Building and Improvements		Total		Accumulated Depreciation 12/31/02		Depreciable Life
Reno	NV	12/16/2002		—		779		4,482		—		779		4,482		5,261		9	27
Gainesville	FL	12/16/2002		—		350		1,985		—		350		1,985		2,335		4	27
Nassau Bay	TX	12/16/2002		—		404		2,278		—		404		2,278		2,682		5	27
Austin	TX	12/16/2002		—		498		2,802		—		498		2,802		3,300		6	27
Pendleton	OR	12/16/2002		—		103		583		—		103		583		686		1	27
Port St. Lucie	FL	12/16/2002		—		774		4,388		—		774		4,388		5,162		9	27
Raytown	MO	12/16/2002		—		131		745		—		131		745		876		2	27
Conyers	GA	12/16/2002		—		313		1,774		—		313		1,774		2,087		4	27
Van Nuys	CA	12/16/2002		—		216		1,225		—		216		1,225		1,441		3	27
Waycross	GA	12/16/2002		—		144		867		—		144		867		1,011		2	27
Decatur	AL	12/20/2002		—		33		185		—		33		185		218		—	27
Harbor Oaks	FL	12/20/2002		—		21		119		—		21		119		140		—	27
Hatcher Lane	TN	12/20/2002		—		35		197		—		35		197		232		—	27
White Bluff	TN	12/20/2002		—		31		176		—		31		176		207		—	27
Vanleer	TN	12/20/2002		—		14		81		—		14		81		95		—	27
Mineral Wells	TN	12/20/2002		—		31		173		—		31		173		204		—	27
Columbia	TN	12/20/2002		—		23		129		—		23		129		152		—	27
Morrison	TN	12/20/2002		—		11		65		—		11		65		76		—	27
			$	149,886	$	30,079	$	215,703	$	—	$	30,079	$	215,703	$	245,782	$	14,693

F-30

(a) Reconciliation of Real Estate:

The following table reconciles the real estate investments for the period from September 10, 2002 to December 31, 2002 (in thousands):

	2002
Historical balance	$	170,078
Distribution of assets not acquired		(3,517	)
Fair value adjustment recorded in formation transaction		22,104
Carrying value at commencement of operations		188,665
Acquisitions		63,233
Assets held for sale		(1,823	)
Dispositions		(4,293	)
Balance at end of period(1)	$	245,782

The following table reconciles the real estate investments for the period from January 1, 2002 to September 9, 2002 and the two years ended December 31, 2001 (in thousands):

	2002			2001			2000
Balance at beginning of period	$	174,718		$	169,658		$	34,340
Acquisitions		797			24,126			142,931
Capital expenditures		1,100			1,025			155
Dispositions		(6,537	)		(20,091	)		(7,768	)
Balance at end of period(1)	$	170,078		$	174,718		$	169,658

(1) Amounts do not include leasehold interests as reflected in the accompanying consolidated and combined balance sheet.

(b) Reconciliation of Accumulated Depreciation:

The following table reconciles the accumulated depreciation on real estate investments for the period from September 10, 2002 to December 31, 2002 (in thousands):

	2002
Historical balance	$	17,483
Distribution of assets not acquired		(289	)
Fair value adjustment recorded in formation transaction		(4,766	)
Carrying value at commencement of operations		12,428
Depreciation expense		2,629
Assets held for sale		(66	)
Dispositions		(298	)
	$	14,693	(2)

(2) Excludes $524 of accumulated amortization relating to leasehold interests reflected in the accompanying December 31, 2002 consolidated balance sheet.

F-31

The following table reconciles the accumulated depreciation on real estate investments for the period from January 1, 2002 to September 9, 2002 and the two years ended December 31, 2001 (in thousands):

	2002			2001			2000
Balance at beginning of period	$	12,193		$	3,909		$	1,360
Depreciation expense		5,831			8,652			3,230
Dispositions		(541	)		(368	)		(681	)
Balance at end of period	$	17,483		$	12,193	(3)	$	3,909

(3) Excludes $345 of accumulated amortization relating to leasehold interests reflected in the accompanying December 31, 2001 combined balance sheet.

F-32

Bank of America Small Office Portfolio

Unaudited Combined Statement of Revenues and Certain Expenses for the Eleven Months Ended November 30, 2002, with Accompanying Notes.

F-33

Bank of America Small Office Portfolio

Combined Statement of Revenues and Certain Expenses

For the Eleven Months Ended November 30, 2002

(In thousands)

Unaudited

Revenues:
Rental income	$	1,162
Expenses:
Utilities		820
Property taxes		666
Insurance		175
Other building operating		39
Cleaning and janitorial		497
Repairs and maintenance		980
Property management fees		499
Total expenses		3,676
Certain expenses in excess of revenues	$	2,514

See accompanying notes

F-34

Bank of America Small Office Portfolio

Notes to Combined Statement of Revenues and Certain Expenses

For the Eleven Months Ended November 30, 2002

1. Business and Basis of Presentation

Business

The accompanying combined statement of revenues and certain expenses relates to the operation of 16 properties owned by Bank of America (the “Bank of America Small Office Portfolio”). The Bank of America Small Office Portfolio was acquired by American Financial Realty Trust (“AFR”) on December 16, 2002.

Basis of Presentation

The accompanying combined statement of revenues and certain expenses for the eleven months ended November 30, 2002 was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. The combined statement of revenues and certain expenses is not representative of the actual operations of the properties for the period presented nor is it indicative of future operations as certain expenses, consisting of interest expense, leasing commissions, tenant improvements, depreciation, and amortization, which may not be comparable to expenses expected to be incurred by AFR in future operations of the properties, have been excluded.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

2. Significant Accounting Policies

Revenue Recognition

Rental income is recognized on a straightline basis over the terms of the respective lease agreements. Certain tenants are also required to pay percentage rent based on sales above a stated base amount during the lease year. Percentage rent is recognized as revenue based on actual reported sales for each tenant less the applicable stated base amount.

Recoveries

Certain operating expenses incurred in the operations of the properties are recoverable from the tenants. The recoverable amounts are either adjusted periodically on a prospective basis or adjusted annually based on actual expenses incurred. Expense recoveries are recognized as revenue in the period in which the applicable costs are incurred. Tenant credit losses are provided when they become known.

Use of Estimates

The preparation of the combined statement of revenues and certain expenses in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-35

Bank of America Small Office Portfolio

Notes to Combined Statement of Revenues and Certain Expenses—(Continued)

For the Eleven Months Ended November 30, 2002

3.    Tenant Leases

The Bank of America Small Office Portfolio includes leases to office and retail tenants under non-cancellable lease agreements with terms ranging from 1 to 15 years. The leases generally provide for fixed annual minimum rents, contingent rents based on sales volume and recoveries of certain operating expenses. Approximate annual future minimum rental commitments to be received from executed operating leases as of December 31, 2002, exclusive of expense recoveries and contingent rents, are as follows:

Year Ending December 31,
2003	$	1,090
2004		889
2005		587
2006		439
2007		149
Thereafter		14
	$	3,168

4. Related Party Transactions

Insurance expense incurred by Bank of America under its self-insurance program is allocated by Bank of America to the Bank of America Small Office Portfolio based on the type and size of each individual property.

Security expense incurred by Bank of America under its master security agreement is allocated to the Bank of America Small Office Portfolio based on the actual cost incurred on behalf of each individual property as billed by the service provider.

Bank of America occupies approximately 185,000 square feet representing approximately 36% of the Bank of America Small Office Portfolio. No revenue attributable to the space occupied by Bank of America is included in the combined statement of revenues and certain expenses.

F-36

Bank Of America Specifically Tailored Transaction

Unaudited Combined Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002, with Accompanying Notes.

F-37

Bank of America Specifically Tailored Transaction

Combined Statement of Revenues and Certain Expenses

For the year ended December 31, 2002

(in thousands)

Unaudited

Revenues:
Rental Income	$	15,525
Building commissions and service		78
Garage		598
Other		667
Total revenues		16,868
Expenses:
Utilities		14,424
Property taxes		14,521
Insurance		1,900
Other building operating		6,654
Cleaning and janitorial		12,196
Repairs and maintenance		18,890
Property management fees		6,558
Other expenses		889
Total expenses		76,032
Certain expenses in excess of revenues	$	59,164

See accompanying notes

F-38

Bank of America Specifically Tailored Transaction

Notes to Combined Statement of Revenues and Certain Expenses

Year Ended December 31, 2002

1. Business and Basis of Presentation

Business

The accompanying combined statement of revenues and certain expenses relates to the operation of 124 properties owned by Bank of America (the “Bank of America Specifically Tailored Transaction”). The Bank of America Specifically Tailored Transaction is expected to be acquired by American Financial Realty Trust (“AFR”).

Basis of Presentation

The accompanying combined statement of revenues and certain expenses for the year ended December 31, 2002 was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. The combined statement of revenues and certain expenses is not representative of the actual operations of the properties for the period presented nor is it indicative of future operations as certain expenses, consisting of interest expense, leasing commissions, tenant improvements, depreciation, and amortization, which may not be comparable to expenses expected to be incurred by AFR in future operations of the properties, have been excluded.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

2. Significant Accounting Policies

Revenue Recognition

Rental income is recognized on a straightline basis over the terms of the respective lease agreements. Certain tenants are also required to pay percentage rent based on sales above a stated base amount during the lease year. Percentage rent is recognized as revenue based on actual reported sales for each tenant less the applicable stated base amount. Tenant credit losses are provided when they become known.

Recoveries

Certain operating expenses incurred in the operations of the properties are recoverable from the tenants. The recoverable amounts are either adjusted periodically on a prospective basis or adjusted annually based on actual expenses incurred. Expense recoveries are recognized as revenue in the period in which the applicable costs are incurred.

Use of Estimates

The preparation of the combined statement of revenues and certain expenses in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Tenant Leases

The Bank of America Specifically Tailored Transaction includes leases to office and retail tenants under non-cancellable lease agreements with terms ranging from 1 to 15 years. The leases generally provide for fixed annual minimum rents, contingent rents based on sales volume and recoveries of certain operating expenses.

F-39

Bank of America Specifically Tailored Transaction

Notes to Combined Statement of Revenues and Certain Expenses—(Continued)

Year Ended December 31, 2002

Approximate annual future minimum rental commitments to be received from executed operating leases as of December 31, 2002, exclusive of expense recoveries and contingent rents, are as follows:

Year Ending December 31,
2003	$	15,051
2004		13,902
2005		12,696
2006		11,757
2007		9,244
Thereafter		24,412
	$	87,062

4. Related Party Transactions

Insurance expense incurred by Bank of America under its self-insurance program is allocated by Bank of America to the Bank of America Specifically Tailored Transaction based on the size and type of each individual property.

Security expense incurred by Bank of America under its master security agreement is allocated to the Bank of America Specifically Tailored Transaction based on the actual cost incurred on behalf of each individual property as billed by the service provider.

Bank of America occupies approximately 5.3 million square feet representing approximately 65% of the Bank of America Specifically Tailored Transaction net rentable area. No revenue attributable to the space occupied by Bank of America is included in the considered statement of revenues and expenses.

F-40

No dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those contained in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us or the underwriters. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.

TABLE OF CONTENTS

	Page
A Warning About Forward-Looking Statements	iv
Summary	1
Risk Factors	16
Use of Proceeds	38
Capitalization	39
Dilution	40
Dividend Policy and Distributions	41
Selected Financial Information	42
Unaudited Pro Forma Consolidated Financial Information	45
Management’s Discussion and Analysis of Financial Condition and Results of Operation	49
Our Business and Properties	63
Management	97
Principal and Selling Shareholders	112
Certain Relationships and Related Transactions	114
Description of Shares	118
Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws	122
Partnership Agreement	127
Registration Rights and Lock-up Agreements	130
Federal Income Tax Consequences of Our Status as a REIT	132
Underwriting	149
Legal Matters	152
Experts	152
Where You Can Find More Information	152
Glossary	154
Index to Financial Statements and Financial Statement Schedules	F-1

Until                     , 2003, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

[AMERICAN FINANCIAL REALTY TRUST LOGO]

Common Shares

OFFERING MEMORANDUM

Joint Book-Running Managers

Banc of America Securities LLC

Friedman Billings Ramsey

UBS Warburg

Wachovia Securities

                    , 2003

PART II.    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 31.    Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses of the sale and distribution of the securities being registered, all of which are being borne by the Registrant.

Securities and Exchange Commission registration fee	$	48,540
NASD filing fee		*
NYSE listing fee		*
Printing and engraving fees		*
Legal fees and expenses		*
Accounting fees and expenses		*
Blue sky fees and expenses		*
Transfer Agent and Registrar fees		*
Advisory fee		*
Miscellaneous		*
Total	$	*

* To be filed by amendment.

All expenses, except the Securities and Exchange Commission registration fee, are estimated.

Item 32.    Sales to Special Parties.

Concurrently with the sale of a total of 40,765,241 common shares to Friedman, Billings, Ramsey & Co., Inc., the initial purchaser in our September 2002 private placement, we sold 268,817 common shares to Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees; 43,010 common shares to Louis D. Davis, Jr., the father-in-law of Nicholas S. Schorsch; and 6,000 common shares to Irvin G. Schorsch, Jr., the father of Nicholas S. Schorsch. The per share purchase price for these common shares was $9.30, which was the offering price in our September 2002 private placement minus the initial purchaser’s discount.

Item 33.    Recent Sales of Unregistered Securities.

In the preceding three years, we have issued the following securities that were not registered under the Securities Act:

Pursuant to our 2002 Equity Incentive Plan, we have granted options to purchase a total of 2,812,625 common shares and a total of 210,000 restricted shares of the 1,290,000 restricted share awards that remain available for award under our Equity Incentive Plan, the compensation and human resources committee of our board of trustees approved in December 2002 grants to our senior management team of 1,141,000 restricted share awards subject to completion of our initial public offering. For a more detailed description of our Equity Incentive Plan, see “Management—2002 Equity Incentive Plan” in this Registration Statement. In granting the restricted shares, and options to purchase common shares, we relied upon exemptions from registration set forth in Rule 701 and Section 4(2) of the Securities Act.

On September 10, 2002 and October 7, 2002, we sold a total of 40,765,241 common shares in a private unregistered offering to Friedman, Billings, Ramsey & Co., Inc. pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act, which shares were subsequently resold to other investors in accordance with Rule 144A of, and other available exemptions set forth in, the Securities Act. The per share purchase price of the common shares sold to the initial purchaser was $9.30, and the per share offering price to our investors was $10.00, except in the case of 3,763,441 common shares sold by Friedman, Billings, Ramsey & Co., Inc. to FBR Asset Investment Corporation, for which FBR Asset Investment Corporation paid $9.30 per share.

II-1

Concurrently with the sale of a total of 40,765,241 common shares to Friedman, Billings, Ramsey & Co., Inc., in our September 2002 private placement we sold 268,817 common shares to Nicholas S. Schorsch, our Chief Executive Officer, President and Vice Chairman of our board of trustees; 43,010 common shares to Louis D. Davis, Jr., the father-in-law of Nicholas S. Schorsch; and 6,000 common shares to Irvin G. Schorsch, Jr., the father of Nicholas S. Schorsch. The per share purchase price for these common shares was $9.30, which was the offering price in our September 2002 private placement minus the initial purchaser’s discount.

Item 34.    Indemnification of Trustees and Officers.

The Maryland REIT Law permits a Maryland real estate investment trust to include in its declaration of trust a provision limiting the liability of its trustees and officers to the trust and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active or deliberate dishonesty established by a final judgment as being material to the cause of action. Our declaration of trust contains a provision which limits the liability of our trustees and officers to the maximum extent permitted by Maryland law.

Our declaration of trust permits us, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former trustee or officer or (b) any individual who, while a trustee and at our request, serves or has served another real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a trustee, director, officer or partner of such real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former trustee or officer of our company. Our bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former trustee or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a trustee or officer of our company and at our request, serves or has served another real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity, against any claim or liability to which he may become subject by reason of such status. Our declaration of trust and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of our company in any of the capacities described above and to any employee or agent of our company or a predecessor of our company. Maryland law requires us to indemnify a trustee or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity.

The Maryland REIT Law permits a Maryland real estate investment trust to indemnify and advance expenses to its trustees, officers, employees and agents to the same extent as permitted by the Maryland General Corporation Law (the “MGCL”) for directors and officers of Maryland corporations. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be a party by reason of their service in those or other capacities unless it is established that (a) the act or omission if the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was a result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right if the corporation or if the trustee or officer was adjudged to be liable for an improper personal benefit. In accordance with the MGCL and our bylaws, our bylaws require us, as a condition to advancing expenses, we must obtain (a) a written affirmation by the trustee or officer of his good faith belief that he has met the standard of conduct necessary for indemnification and (b) a written statement by or on his behalf to repay the amount paid or reimbursed by us if it shall ultimately be determined that the standard of conduct was not met.

II-2

Item 35.    Treatment of Proceeds from Stock Being Registered.

None of the proceeds will be credited to an account other than the appropriate capital share account.

Item 36.    Financial Statements and Exhibits.

(a) Financial Statements.    See page F-1 for an index of the financial statements included in the Registration Statement.

(b) Exhibits.    The following exhibits are filed as part of, or incorporated by reference into, this registration statement on Form S-11:

Exhibit	Description of Document
1.1*	Form of Underwriting Agreement by and among the Registrant, Banc of America Securities LLC, Friedman, Billings, Ramsey & Co., Inc. and the underwriters named therein.
3.1*	Amended and Restated Declaration of Trust of the Registrant.
3.2*	Bylaws of the Registrant.
3.3*	Amended and Restated Agreement of Limited Partnership of First States Group, L.P., dated September 10, 2002.
4.1	Registration Rights Agreement, dated September 4, 2002, by and among the Registrant and the Contributors listed on Schedule 1 thereto.
4.2	Common Shares Registration Rights Agreement, dated September 4, 2002, by and among the Registrant and Friedman, Billings, Ramsey & Co., Inc.
4.3	Registration Rights Agreement, dated September 10, 2002, by and among the Registrant, Nicholas S. Schorsch, Irvin G. Schorsch and Louis D. Davis, III.
4.4	Common Shares Registration Rights Agreement, dated September 10, 2002, by and between the Registrant and Friedman, Billings, Ramsey & Co., Inc., as agent for the investors listed on Schedule A thereto.
5.1*	Opinion of Saul Ewing LLP, with respect to the legality of the shares being registered.
8.1*	Opinion of Morgan, Lewis and Bockius LLP with respect to tax matters.
10.1*	Contribution Agreement, dated September 4, 2002, by and between the Contributors and First States Group, L.P.
10.2*	Limited Partnership Agreement of First States Partners II, L.P., dated September 12, 2000.
10.3*	Purchase and Sale Agreement, by and among State Street Bank and Trust Company of Connecticut, National Association, Patrick E. Thebado, Renat, Inc., Dana Commercial Credit Corporation and First States Group, L.P., dated December 17, 2002.
10.4*	Lease Agreement (1997-C), dated June 4, 1997, by and between State Street Bank and Trust Company of Connecticut, National Association and Nationsbank, N.A.
10.5*	Lease Agreement (1997-D), dated June 4, 1997, by and between State Street Bank and Trust Company of Connecticut, National Association and Nationsbank, N.A.
10.6*	Bridge Credit Agreement, dated January 21, 2003, by and among First States Investors 3500, LLC, First States Group, L.P., First States Investors 3500A, LLC, States Street Bank and Trust Company of Connecticut, Patrick Thebado, Bank of America, N.A. and Banc of America Securities LLC.
10.7*	Agreement, dated August 7, 2002, by and between Bank of America, N.A. and American Financial Resource Group, LLC.
10.8*	Master Purchase, Sale and Lease Transfer Agreement, dated September 12, 2002, by and between Wachovia Bank, National Association and First States Group, L.P.
10.9*	Agreement, dated November 22, 2002, by and between Bank of America, N.A. and American Financial Resource Group, LLC.
10.10*	Agreement of Sale and Purchase, dated February 14, 2003, by and between Bank of America, N.A. and First States Group, L.P.

II-3

Exhibit	Description of Document
10.11*	Purchase and Sale Agreement, dated August 9, 2002, by and among Prefco Five Limited Partnership, American Financial Resource Group, LLC, Prefco V Holdings LLC and Pitney Bowes Real Estate Financing Corporation.
10.12*	Purchase and Sale Agreement, dated January 24, 2003, by and between Finova Capital Corporation and First States Group, L.P.
10.13*	Purchase and Sale Agreement, dated January 30, 2003, by and among Prefco III Realty, LLC, First States Group, L.P. and Pitney Bowes Real Estate Financing Corporation.
10.14*	Amended and Restated Master Option Agreement, dated July 16, 2002, by and among First States Properties, L.P., First States Holdings, L.P., Nicholas S. Schorsch, Martin Lautman, Arlington Cemetery Company, First States Wilmington JV, LLC and First States Group, L.P.
10.15†*	Employment Agreement, dated September 10, 2002, by and between Nicholas S. Schorsch and the Registrant.
10.16†*	Employment Agreement, dated September 10, 2002, by and between Glenn Blumenthal and the Registrant.
10.17†*	Employment Agreement, dated September 10, 2002, by and between William P. Ciorletti and the Registrant.
10.18†*	Employment Agreement, dated October 1, 2002, by and between Edward J. Matey Jr. and the Registrant.
10.19†*	Employment Agreement, dated September 10, 2002, by and between Sonya A. Huffman and the Registrant.
10.20†*	Employment Agreement, dated September 10, 2002, by and between Shelley D. Schorsch and the Registrant.
10.21†*	Employment Agreement, dated January 6, 2002, by and between Robert J. Delany and First States Group, L.P.
10.22†*	Employment Agreement, dated January 27, 2003, by and between Jeffrey C. Kahn and First States Group, L.P.
10.23†*	Form of Employee Confidentiality and Non-Competition Agreement.
10.24†*	Supplemental Executive Retirement Plan.
10.25†*	Equity Incentive Plan.
10.26†*	Key Employee Incentive Compensation Plan.
10.27*	Mortgage Note, dated September 28, 2000, by and between First States Partners 123 South Broad I, L.P. and Credit Suisse First Boston Mortgage Capital LLC for $36,550,000.
10.28*	Mortgage Note, dated September 28, 2000, by and between First States Partners 123 South Broad I, L.P. and Credit Suisse First Boston Mortgage Capital LLC for $53,030,000.
10.29*	Agreement, dated February 24, 2003, by and between Salomon Smith Barney Inc. and the Registrant.
21.1*	Subsidiaries of the Registrant.
23.1*	Consent of Saul Ewing (included in its opinion filed as Exhibit 5.1 hereto).
23.2*	Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 8.1 hereto).
23.3	Consent of KPMG LLP (independent auditors of the Registrant).
24.1	Power of attorney (included in the signature page to this Registration Statement).

* To be filed by amendment.

† Compensatory plan or arrangement.

Item 37.    Undertakings.

(a)    The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

(b)    Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to trustees, officers or controlling persons of the Registrant pursuant to the foregoing provisions, or

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otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(c)    The undersigned Registrant hereby further undertakes that:

(1)    For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance under Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act of 1933 shall be deemed to part of this registration statement as of the time it was declared effective.

(2)    For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES AND POWERS OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, as amended, the undersigned registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Borough of Jenkintown, Commonwealth of Pennsylvania, on the 28th day of February, 2003.

AMERICAN FINANCIAL REALTY TRUST
By:	/s/    NICHOLAS S. SCHORSCH Nicholas S. Schorsch Chief Executive Officer, President and Vice Chairman of the Board of Trustees

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Nicholas S. Schorsch and William P. Ciorletti, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and any additional related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (including post-effective amendments to the registration statement and any such related registration statements), and to file the same, with all exhibits thereto, and any other documents in connection therewith, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    NICHOLAS S. SCHORSCH Nicholas S. Schorsch	Vice Chairman of the Board of Trustees, Chief Executive Officer and President (Principal Executive Officer)	February 28, 2003
/s/    WILLIAM P. CIORLETTI William P. Ciorletti	Senior Vice President – Finance and Chief Financial Officer (Principal Financial and Accounting Officer)	February 28, 2003
/s/    LEWIS S. RANIERI Lewis S. Ranieri	Chairman of the Board of Trustees	February 28, 2003
/s/    GLENN BLUMENTHAL Glenn Blumenthal	Senior Vice President – Asset Management, Chief Operating Officer and Trustee	February 28, 2003
/s/    HENRY FAULKNER, III Henry Faulkner, III	Trustee	February 28, 2003
/s/    RAYMOND GAREA Raymond Garea	Trustee	February 28, 2003
/s/    RICHARD A. KRAEMER Richard A. Kraemer	Trustee	February 28, 2003
/s/    J. ROCK TONKEL, JR. J. Rock Tonkel, Jr.	Trustee	February 28, 2003

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